Presentation on

Financing & Economics of City Gas Distribution

Conference on “Distribution of Gas”

Conducted by
India Infrastructure

March 04, 2009

 Feedback’s Shareholders

Shareholder Director
L&T Shailendra N. Roy
N. Sivaraman
IDFC A.K.T. Chari
Manavendra K. Sinha
HDFC Renu S. Karnad

Mission Holdings Vinayak Chatterjee (Chairman)

R. S. Ramasubramaniam (Vice Chairman)
P. Ramesh

04/03/2009
04/03/2009

2 Energy Division
 Infrastructure Focus …
• Highways
• Railways
• MRTS
Transportation & Logistics
• Ports
• Airports
• Logistics
• Power Generation
• Power Transmission
• Power Distribution
Energy
•
•
Power Trading
Power Regulation
• Coal and Mines
• Oil and Gas
• Urban
Water and Sanitation
• Rural

Special Economic Zones
• SEZs

• Factories
Industrial Infrastructure
• Industrial Estates
04/03/2009

3 Energy Division
 … Infrastructure Focus
• Housing
Housing & Townships
• Townships

• IT Parks
Commercial Infrastructure
• Corporate Offices
• Commercial Buildings

• Shopping Malls
Retail & Entertainment
• Multiplexes

• Hotels
Hospitality
• Convention Centres
• Clubs

• Hospitals
Healthcare
• Primary Healthcare

• Urban Planning
Urban Development
• Urban Infrastructure

04/03/2009
04/03/2009

4 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
Consulting
Financial Advisory
Process Improvement
Urban Planning
Capacity Building
Investment Banking
Transactions

PPP Advisory
Incubation
Project Development
Project Structuring
R&R
Master Planning
Planning & Infrastructure Planning


Engineering Detailed Project Report
Design & Engineering
Design Management
Project Management
Construction Management
04/03/2009
04/03/2009 Construction Supervision
5 Energy Division
 Energy
Sub-sectors Services we offer:
Power Generation Consulting
Power Transmission Transactions
Power Distribution Project Development
Power Trading Planning and Engineering
Power Regulation Project Management
Feedback is supervising the construction
Coal & Mines of this new
Feedback bridge over
is working withthe
theGanges
Gujaratat
State EnergyKanpur on NH-25.
Corporation to develop fuel
Oil & Gas 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

6 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
04/03/2009
composition, Domestic connections, Penetration
8 Energy Division
 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

9 Energy Division
Economics & Financials Drivers
 Business Segments

Gas
Marketing
Business

City Gas
Distribution
Business

CNG
Network
Compression
Business
Business

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

04/03/2009

11 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

04/03/2009

12 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

04/03/2009

13 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
04/03/2009

14 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 51.97
50 40.26
40
Rs/$
30
20
10
0
03.03.2008 03.03.2009

Fluctuation in the alternate fuel price

Price in Price in Price
August February Reduction
Fuel Category Unit 2008 2009 %
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
04/03/2009 substantially impact the CGD economics
15 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 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

16 Energy Division
 Factors affecting tariff and margin
Optimistic volume
Lower network tariff & Compression charges Pessimistic
Enhances success in bidding but higher risk also case for
May lead to under recovery of even Fixed Cost someone may
Pessimistic volume be Optimistic
Higher network tariff & Compression charges case for others
May reduce the winning chance
and vice versa
Cost of gas
To fetch reasonable marketing margin Whether Tariff
Economical for end consumers fixation for 25
Alternate
Landed
Fuel Price
Price for years a “Blind
for Offered Demand
Consumer
Customer Discount
Customer
in USD/
% Game”
in USD/
mmbtu
mmbtu
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
04/03/2009

17 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
04/03/2009

18 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
04/03/2009

20 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

04/03/2009

21 Energy Division
 Operating Parameters Comparison

15

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

0
MGL
IGL
GGCL

*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
04/03/2009

22 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%
23
GGCL’s CNG business grew by 30% y-o-y, hence improved performance Energy Division
 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

24 Energy Division
 Case Study: Other Projects
Company Leading Present Equity structure Financial Peak
JV Closure Debt
Partner Equity
With GAIL Ratio

AGL HPCL GAIL: HPCL: Govt.: 5% Public/Fl: Under

22.50% 22.50% 50% process NA
BGL HPCL GAIL: 25% HPCL: 25% - Public/FI: Under NA
50% process
CUGL BPCL GAIL: BPCL: 10% Govt.: 5% Public/FI: Accomplis
22.50% 50% hed 2.3:1
GGL IOCL GAIL: 25% IOCL: 25% FI: 40% Individual: Under
10% process 2.0:1
MNGL BPCL GAIL: BPCL: Govt.: 5% Public/FI: Under
22.50% 22.50% 50% process 2.0:1
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
04/03/2009

25 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
04/03/2009

26 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

Lender’s due diligence is expected to be tighter for Non-Gas owners in the

prevailing Regulatory domain
04/03/2009

27 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

04/03/2009

28 Energy Division
After Long Wait…Finally 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

India’s Leading Integrated

Infrastructure Services Company

www.feedbackventures.com