Post on 29-Nov-2014
Presentation on
Financing & Economics of City Gas Distribution
Conference on “Distribution of Gas”
Conducted by
India Infrastructure
March 04, 2009
04/03/2009
Energy Division2
Feedback’s Shareholders
Vinayak Chatterjee (Chairman)R. S. Ramasubramaniam (Vice Chairman)P. Ramesh
Mission Holdings
Shailendra N. Roy N. Sivaraman
L&T
Shareholder Director
IDFC A.K.T. ChariManavendra K. Sinha
HDFC Renu S. Karnad
04/03/2009
04/03/2009
Energy Division3
IInfrastructure Focus …
• SEZs�Special Economic Zones
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• Factories• Industrial Estates
Industrial Infrastructure
• Urban• Rural
Water and Sanitation
• Power Generation• Power Transmission• Power Distribution• Power Trading• Power Regulation• Coal and Mines• Oil and Gas
Energy
• Highways• Railways• MRTS• Ports• Airports• Logistics
Transportation & Logistics
04/03/2009
Energy Division4
… IInfrastructure Focus
• Hospitals
• Primary Healthcare�Healthcare
• Urban Planning• Urban Infrastructure�Urban Development
• Shopping Malls
• Multiplexes�Retail & Entertainment
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• Hotels
• Convention Centres
• Clubs
Hospitality
• IT Parks
• Corporate Offices
• Commercial Buildings
Commercial Infrastructure
• Housing
• TownshipsHousing & Townships
04/03/2009
04/03/2009
Energy Division5
IIntegrated Offer
04/03/2009
Design Management
Construction Management
Construction Supervision
����Project Management
Incubation
Project Structuring
R&R
����Project Development
����
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Master Planning
Infrastructure Planning
Detailed Project Report
Design & Engineering
Planning & Engineering
Investment Banking
PPP AdvisoryTransactions
Strategic Planning
Business Planning
Feasibility
Financial Advisory
Process Improvement
Urban Planning
Capacity Building
Consulting
Feedback Ventures offers an integrated suite of services across
all steps of the infrastructure value chain. These cover five
broad groups which are further categorized into 19 sub-services.
04/03/2009
Energy Division6
Energy
Sub-sectorsPower Generation
Power Transmission
Power Distribution
Power Trading
Power Regulation
Coal & Mines
Oil & Gas
Services we offer:Consulting
Transactions
Project Development
Planning and Engineering
Project Management
Some of our projects in this sector:Detailed design and project management of sub-stations for NDPL.
Undertaking generation and distribution due diligence for Private Equity firms.
Advisory services to the entire spectrum─from captive power plants to UMPPs.
Implementation of rural-based franchisee system for Uttarakhand Power Corporation.
Assisting leading states on reforms, regulations, process improvement and project based assignments.
Advising most leading developers on their power, coal and gas strategies and projects.
Distribution infrastructure planning for the Government of Maharashtra across 3 zones.
Empanelled by Min. of Power, PFC, USAID as Partner Training Institute under DRUM.
Feedback is supervising the construction of this new bridge over the Ganges at
Kanpur on NH-25.Feedback is working with the Gujarat
State Energy Corporation to develop fuel and procurement strategy.
26,000 MW of new capacity
04/03/2009
Energy Division8
Investment Opportunity in CGD project
Expected Cities to be covered under CGD network: 70
Typical Gas requirement per city: 0.5 to 1.0 mmscmd by end of 15-20 years
Typical Investment requirement per city: Rs. 300 crsTypical Phase I investment: 50%-60% of total investment (upto 5 years from date of authorization)
~ 80% investment in first 2-3 years of authorization
Typical Phase II investment: 40%-50% (6th year onwards)
Total investment in the next 5-7 years timeframe (Phase I): ~ Rs. 10,000 crs (USD 2 bn)
Total Equity Requirement: Rs. 3,000 - 4,000 crs
Total Debt Requirement: Rs. 6,000 - 7,000 crs
Steel Grid, CNG Stations, PE Pipeline and Last Mile Connectivity to account for major share of investment
Project Cost depends on extent of Geographical Area, Visibility requirement, Demand composition, Domestic connections, Penetration
04/03/2009
Energy Division9
Bidder’s Profile for CGD projects
Bidding on Standalone basis
Primarily Gas Owner
Joint Venture
Gas Owner with OMCs
Existing CGD Company with OMC
Pipe/Equipment manufacturer has also shown interest in CGD projects
Some are adopting “Wait & Watch” policy till the first round bidding is over
Interesting to watch the Round One Outcome and profile of Round Two Bidders
Bid for 6 cities already submitted. Notification by PNGRB for 7 cities…more in pipeline
04/03/2009
Energy Division11
Business Segments
Network Business
CNG Compression
Business
Gas Marketing Business
City Gas Distribution
Business
Need to have the Integrated view of the Entire CGD business segment
04/03/2009
Energy Division12
Economic drivers(1)
CGD Projects
Network backbone
Lengthy gestation period
Significant capital outlays during initial years
Generally Break even in 4-5 years, depending upon the demand, consumer mix and geographical area
Need for
Fiscal incentives
Clarity of law
Stability of regime
Network exclusivity for the authorized CGD player
04/03/2009
Energy Division13
Economic drivers(2)
Transmission pipelines (Cross Country) enjoy a 10 year tax holiday (Section 80 IA) out of first 15 years of Commercial Operation date-Infrastructure status
However, MAT applicable – 11.33% of Book profits during tax holiday
CGD projects not yet included under Infrastructure projects
Infrastructure status important to ease access to External Commercial Borrowings
Development of CGD networks will require imported equipment
Imports liable to Customs duty-Increase Project Cost thus Tariff
Infrastructure status to CGD projects would positively impact the economics
04/03/2009
Energy Division14
Economic drivers(3)
Gas transmission projects eligible for project import status
Scope should also encompass CGD project – Clarity needed
Compression of Natural Gas for supply to CNG Stations is specified to be “manufacture” liable to excise duty
Eligible input credit should be available
Gas allocation
EGoM stipulated earmarking of 5 mmscmd for CGD projects for Domestic and CNG sale
CGD Company may need to procure gas for Industrial and Commercial consumer category from the open market
Whether gas quantity is sufficient
Principle of gas allocation not yet clear
Fiscal incentives are expected to entail earlier recouping of investment as well as increase the profitability
04/03/2009
Energy Division15
Factors impacting Profitability(1)
Sales realization in Rupees and Purchase Price of gas in USD
Financials highly sensitive to Gas input price, Gas Sales Price and demand penetration
Whether 100% pass through of increase in gas price possible
Fluctuation in the alternate fuel price
Fuel Category Unit
Price in
August
2008
Price in
February
2009
Price
Reduction
%
Domestic LPG Rs/ Kg 24 22 7%
Commercial LPG Rs/ Kg 61 41 33%
Furnace Oil Rs/ Ltr 32 16 50%
MS Rs/ Ltr 50 45 10%
Source: Industry
Sharp reduction in Alternate fuel price and Sharp Re. depreciation will substantially impact the CGD economics
Re depreciation
40.26
51.97
0
10
20
30
40
50
60
03.03.2008 03.03.2009
Rs/$
04/03/2009
Energy Division16
Factors impacting Profitability(2)
Regulated price of Domestic LPG as well as Motor Fuel
May require Industry and Commercial sales to Cross subsidize
Possibility of diversion of Domestic LPG Cylinders for commercial use post CGD implementation
Role of Regulatory Agency as well as OMC very critical
Adjacent city having price differential in gas prices due to APM gas supply and non–APM gas supply
Enabling Regulation/ Legislation on Clean Fuel use by the State Government
Need for Enabling Regulation and check on diversion of Domestic LPG
04/03/2009
Energy Division17
Factors affecting tariff and marginOptimistic volume
Lower network tariff & Compression charges
Enhances success in bidding but higher risk also
May lead to under recovery of even Fixed Cost
Pessimistic volume
Higher network tariff & Compression charges
May reduce the winning chance
Cost of gas
To fetch reasonable marketing margin
Economical for end consumers
Consumer
Alternate
Fuel Price
for
Customer
in USD/
mmbtu
Offered
Discount
Landed
Price for
Customer
in USD/
mmbtu
Demand
%
Domestic 10 30% 7 10%Commercial 19 15% 16 10%Industrial 9 15% 8 60%CNG 19 30% 13 20%
Weighted average Selling price of gas is expected to vary between 9.50 to 10.5 USD/ mmbtu based on current prevailing price of alternate fuel and demand composition
Pessimistic case for
someone may be Optimistic case for others and vice versa
Whether Tariff fixation for 25 years a “Blind
Game”
04/03/2009
Energy Division18
Possible development post authorization period
CNG: Low Competition as additional operating cost in Daughter – Booster Station
Domestic: Very low competition as Low volume and low profitability
Industrial/ CommercialProspect of high volume and high profitability
Sufficient incentive for 3rd Party to focus on such segment
Potential loss of large industrial consumers could also negatively accentuate load swings in the network making operations difficult
Territory having large industrial load are susceptible to more risk
Whether the “Open access” in the CGD business post exclusivity would have the same fete as happened in the Power Sector
Probability of Consolidation, Mergers & Acquisitions
04/03/2009
Energy Division20
Financing in CGD and Transmission Company
Equity Financing
Financial Institutions/ Private Equity Investors have invested in CGD and Gas Transmission Company
IDFC, ILFS, Axis Bank
Debt Financing
Financial Institution, Commercial Banks and IFC
Successful IPO by Gujarat Gas, IGL, GSPL
Companies such as EKC, Nitin Fire Protection System got PE investors as well as launched successful IPO
Gujarat being a mature gas market, Equity and Debt appetite seems to be high
Almost all emerging CGD companies have FIs on Board
04/03/2009
Energy Division21
Financing parameters of matured CGD Companies
GGCL
Initial focus on industrial demand; currently increasing its presence in transport and domestic sector
Peak leverage : 1.3 (CY 1999) and Current leverage : ~ 0
IGL
Initial focus on high margin transport sector backed by regulatory support for conversion; Currently also focussing on domestic and industrial sector
Peak leverage : 0.4 (FY 2002) and Current leverage : ~ 0
MGL
Currently focused on building both transport and industry volumes
Current leverage ~ 0
Minimal additional Capex, typically being funded by Internal Accruals
04/03/2009
Energy Division22
Operating Parameters Comparison
Gas purchase cost for gas to be sold to PNG & CNG consumers is low due to supply of primarily APM gas in IGL and MGL. In GGCL it is primarily non-APM gas
Lowest realization by GGCL
*Figures for MGL and IGL are for FY 08 while for GGCL, figures are for CY 07
MGLIGL
GGCL
0
5
10
15
Gas volume (MMSCMD)
Purchase Cost (Rs. / m^3)
Realization (Rs. / m^3)
04/03/2009
Energy Division23
Ratio Analysis for MGL, IGL and GGCL
Difference in Margins due to the varied consumer profile
Average ROCE in FY 08 is in excess of 40 % for all Companies
Operating margin for MGL, IGL is ~ 40% and for GGCL: 15% - 20%
GGCL’s CNG business grew by 30% y-o-y, hence improved performance
04/03/2009
Energy Division24
Case Study- MNGL
Financial Closure is expected shortly
Equity Structure
GAIL (India) Limited : 22.5%
BPCL : 22.5%
Govt. of Maharashtra : 5%
IDFC PE : 20%, IL & FS : 20%, AXIS Bank : 10%
Total Project Cost : ~ Rs. 470 crs
Debt : Equity Ratio: 2.33:1
Expenditure made till February 2009: ~ Rs. 45 crs
Substantial stake holding by FIs shows their strong appetite for CGD projects
04/03/2009
Energy Division25
Case Study: Other Projects
FIs have generally been comfortable with the CGD Projects
Typical Peak Debt : Equity ratio is 2:1 to 2.33:1, Reduces overtime
Possibility of higher leveraging also exist
Gas cost is expected to constitute ~ 85-90% of the total expenditure
Company Leading
JV
Partner
With GAIL
Financial
Closure
Peak
Debt
Equity
Ratio
AGL HPCL GAIL:
22.50%
HPCL:
22.50%
Govt.: 5% Public/Fl:
50%
Under
process NA
BGL HPCL GAIL: 25% HPCL: 25% - Public/FI:
50%
Under
process
NA
CUGL BPCL GAIL:
22.50%
BPCL: 10% Govt.: 5% Public/FI:
50%
Accomplis
hed 2.3:1
GGL IOCL GAIL: 25% IOCL: 25% FI: 40% Individual:
10%
Under
process 2.0:1
MNGL BPCL GAIL:
22.50%
BPCL:
22.50%
Govt.: 5% Public/FI:
50%
Under
process 2.0:1
Present Equity structure
Source: IndiaInfrastructure
04/03/2009
Energy Division26
Typical Source of Funding
Equity
CGD Promoters
FIs
Strategic divestment
Private Equity Investors
Multilateral Funding Agencies (IFC, ADB)
IPO
Debt
FIs
Commercial Banks
Multilateral Funding Agencies
CGD Company not having gas supply security may divest stake to Gas owners (E&P Companies) post authorization
04/03/2009
Energy Division27
Typical Checklist for Financiers(1)
Authorization
Gas security and Purchase price
Business model
Ability to cross the Stress test specially with respect to gas purchase price, sales price and demand
Threshold Debt Service Coverage Ratio
Adequate Integrated Business IRR as well as Network and Compression Business IRR
Preparedness for demand penetration
Reasonable forecast on expansion of City/ New Industrial Zones
Lender’s due diligence is expected to be tighter for Non-Gas owners in the prevailing Regulatory domain
04/03/2009
Energy Division28
Typical Checklist for Financiers(2)
Adequate Capex capturing and Operating Cost estimate
Capability of the Project management/execution team
Relationship with the Local Government
Relationship with Vendors/ Suppliers
Status of RoU/RoW permission
Preparedness level for undertaking Retail business
How the market develops for the incumbent CGD player post authorization period
Interest rate expected to be ~ 12% with Door to Door Loan tenor of 6-9 years with 1 year moratorium
After Long Wait…Finally Bid Submission is Over
Over to
Authorization!
Financial Closure!!
Project Implementation!!!