Financial Modeling Case Study

Enercon, a leading infrastructure company is looking to set up a large hydro power plant. A
detailed financial model needs to be prepared based on the data provided below.

Project Details

The hydro power project of 1200 MW/hour is slated to start on 1 st Jan 2013 and it is
estimated it will take 60 months for completion. After a detailed due diligence and
assessment of the Techno-Economic Feasibility Report (TEFR) of the project the following
capital costs are estimated:

Capital Costs

Rs. Cr
Land 500
Building 4000
Water Conductor 12000
Dam 14500
Power House 9000

Buildcon has been appointed the EPC contractor for the building complex, water conductor
system and dam.The work on dam and building will be equally spread out over the period of
60 months, with respect to water conductor system, 75% of it will be ready in the first 3
years and the remaining over the last 2 years. The power house for the project will take
about 4 years to build. Work can only be started on power house in the second year of
construction.

The depreciation rates for Building & Water Conductor could be assumed at 3% and for Dam
and Power House at 5%. The scrap rate for assets has been kept at 10%.

Operational Details

Long term (Purchase Power Agreement) PPA has been signed for 70% of the power to be
generated at Rs. 1.50/kw and with an escalation clause of 2% from thereon. The remaining
power will be sold to merchants @ Rs. 3.00/kw with an escalation clause of 1% p.a.

The plant is expected to function at 40% capacity and an auxiliary consumption of 2%.

Financial Structure

The financial structure for this project will be a mix of equity (40%), and debt (36%),
Government grant (24%). The capital needs should be first met by equity, then by debt and
finally by grant. LT Debt for 15 years has been sanctioned by Global Bank @10.5% p.a. The
re-payment should start in the second year of operations.
Short term borrowings can be raised at 12% p.a. and cash balances/liquid funds generally
yield about 2.5% p.a.

Working Capital

O&M expenses are paid in 30 days and receivables are collected in 90 days. Spares need to
be stocked for any kind of repair, generally about 2.5% of the initial CapEx.

Other Information

Income Tax rate is at 30% with a tax holiday of the initial 5 years.

For the first 10 years the dividend need to be paid at 70% and at the rate of 90% of net
income thereafter.

Operations and Maintenance costs can be expected to be at around 1% of the CapEx and
will escalate at 5% thereafter. The employee costs will initially be around 1.5% of CapEx and
will increase @5% thereafter.