Presentation on

Financing & Economics of City Gas Distribution

Conference on Distribution of Gas Conducted by India Infrastructure

March 04, 2009

Feedbacks Shareholders

Shareholder
L&T IDFC HDFC Mission Holdings

Director
Shailendra N. Roy N. Sivaraman A.K.T. Chari Manavendra K. Sinha Renu S. Karnad Vinayak Chatterjee (Chairman) R. S. Ramasubramaniam (Vice Chairman) P. Ramesh

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Energy Division

Infrastructure Focus

Transportation & Logistics

Energy

Highways Railways MRTS Ports Airports Logistics Power Generation Power Transmission Power Distribution Power Trading Power Regulation Coal and Mines Oil and Gas Urban Rural SEZs Factories Industrial Estates
Energy Division

Water and Sanitation Special Economic Zones Industrial Infrastructure

04/03/2009

Infrastructure Focus
Housing Townships

Housing & Townships

Commercial Infrastructure

IT Parks Corporate Offices Commercial Buildings

Retail & Entertainment

Shopping Malls Multiplexes

Hospitality

Hotels Convention Centres Clubs

Healthcare Urban Development

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Hospitals Primary Healthcare

Urban Planning Urban Infrastructure

Energy Division

Integrated Offer
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. Strategic Planning Business Planning Feasibility Financial Advisory Process Improvement Urban Planning Capacity Building Investment Banking PPP Advisory Incubation Project Structuring R&R Master Planning Infrastructure Planning Detailed Project Report Design & Engineering Design Management Construction Management Construction Supervision Energy Division

Consulting

Transactions

Project Development

Planning & Engineering

Project Management
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Energy
Sub-sectors
Power 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

Feedback is supervising the construction of this new bridge over the Ganges at Feedback is working with the Gujarat State EnergyKanpur on NH-25. Corporation to develop fuel and procurement strategy.

Some of our projects in this sector:

Detailed design and project management of sub-stations for NDPL. 26,000 MW of Undertaking generation and distribution due diligence for Private Equity firms. new capacity 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.

04/03/2009

Energy Division

Investment Opportunities in City Gas Distribution

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 crs
Typical 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
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Energy Division

Bidders 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 citiesmore in pipeline
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Energy Division

Economics & Financials Drivers

Business Segments
Gas Marketing Business

City Gas Distribution Business Network Business CNG Compression Business

Need to have the Integrated view of the Entire CGD business segment
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Energy Division

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
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Energy Division

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

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Energy Division

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
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Energy Division

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
Re depreciation
60 50 40 30 20 10 0
51.97 40.26

Rs/$

03.03.2008

03.03.2009

Fluctuation in the alternate fuel price

Fuel Category Domestic LPG Commercial LPG Furnace Oil MS Source: Industry Unit Rs/ Kg Rs/ Kg Rs/ Ltr Rs/ Ltr Price in August 2008 24 61 32 50 Price in Price February Reduction 2009 % 22 7% 41 33% 16 50% 45 10%

Sharp reduction in Alternate fuel price and Sharp Re. depreciation will substantially impact the CGD economics 04/03/2009
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Energy Division

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 nonAPM gas supply Enabling Regulation/ Legislation on Clean Fuel use by the State Government
Need for Enabling Regulation and check on diversion of Domestic LPG

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Energy Division

Factors affecting tariff and margin

Optimistic 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

Pessimistic case for someone may be Optimistic case for others and vice versa

Cost of gas
To fetch reasonable marketing margin Economical for end consumers
Consumer Alternate Fuel Price for Customer in USD/ mmbtu 10 19 9 19 Landed Price for Offered Customer Discount in USD/ mmbtu 30% 15% 15% 30% 7 16 8 13 Demand %

Whether Tariff fixation for 25 years a Blind Game

Domestic Commercial Industrial CNG

10% 10% 60% 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 04/03/2009
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Energy Division

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/ Commercial
Prospect 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
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Energy Division

CGD Project Financing

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
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Energy Division

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
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Energy Division

Operating Parameters Comparison

15

10 Gas volume (MMSCMD) 5 0 MGL IGL GGCL Purchase Cost (Rs. / m^3) Realization (Rs. / m^3)

*Figures for MGL and IGL are for FY 08 while for GGCL, figures are for CY 07
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
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Energy Division

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
04/03/2009

Operating margin for MGL, IGL is ~ 40% and for GGCL: 15% - 20% GGCLs CNG business grew by 30% y-o-y, hence improved performance Energy Division

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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
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Energy Division

Case Study: Other Projects

Company Leading JV Partner With GAIL HPCL HPCL BPCL IOCL BPCL GAIL: 22.50% GAIL: 25% GAIL: 22.50% GAIL: 25% Present Equity structure Financial Closure Peak Debt Equity Ratio AGL BGL CUGL GGL MNGL HPCL: 22.50% HPCL: 25% BPCL: 10% IOCL: 25% BPCL: 22.50% Govt.: 5% Govt.: 5% FI: 40% Govt.: 5% Public/Fl: 50% Public/FI: 50% Public/FI: 50% Individual: 10% Public/FI: 50% Under process Under process Accomplis hed Under process Under process

NA NA

2.3:1 2.0:1 2.0:1

GAIL: 22.50% Source: IndiaInfrastructure

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
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Energy Division

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
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Energy Division

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

Lenders due diligence is expected to be tighter for Non-Gas owners in the prevailing Regulatory domain
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Energy Division

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
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Energy Division

After Long WaitFinally Bid Submission is Over

Over to
Authorization! Financial Closure!! Project Implementation!!!

Thanks

Presenter
Rakesh Jain Feedback Ventures, 3rd Floor Central Plaza, Rajbhawan Road, Hyderabad Tel: +91 40 23415085 rakeshj@feedbackventures.com

Indias Leading Integrated Infrastructure Services Company

www.feedbackventures.com