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Spotlight | December 2013

CLPs pooled financing experiment may get popular

CLP India, the Indian subsidiary of China Light and Power Group, has taken a new route to minimise the financial risk on its wind farms they are adopting the concept of pooled financing. With this, the company has become the first Indian firm to experiment with this new financial concept. The company, which has become the largest company with wind capacity instalment in the country, is quite confident that pooled financing will be the most viable solution to mitigate the financial risk and ensure debt funds for its future projects. Agreeing to this, Samir Ashta, Director Finance and Chief Financial Officer, CLP India, says, "We look to minimise our financing costs with an objective to optimise the efficiency and performance of all our assets."

All the eligible projects in renewable energy (RE) space as a portfolio that have accumulated loans with individual profits and losses are pooled together. According to Ashta, financially closed and running project cash flows are pooled under this model. This way, the cash pooled is much larger, providing better security to the lender. Apart from many obvious benefits, this has resulted in common, standard financing documentation while it took us more than a year for us to accomplish this between banks. This is one of the most time-saving advantages of pooled financing. "With standardisation of documentation as a result of this approach, we will see much quicker financial closures for our projects in the future, which will significantly enhance the overall efficiency and effectiveness of the financing process," added Ashta.

Three lenders IDBI Bank, Standard Chartered and IDFC have extended loan amounting Rs 850 crore to CLP India under the pooled financing model to fund 250 MW of wind power projects. Under the agreement, CLP plans to raise up to Rs 3,000 crore over the next three years from the three banks, which will enable the firm to undertake an additional 650 MW of wind projects, said Ashta.

Relatively new in India, pooled financing is an arrangement wherein banks lend money for different projects of a group. However, unlike traditional consortium financing, the security of each project is pledged to the respective lenders of that project but the cash generated by all the projects forms part of a common cash pooled, and is available to repay the loans advanced by all the lenders.

Cutting loss
The CLP Group has booked heavy loss due to various policy and fuel issues in the country. This is because they have invested enormous amount in the past few years. However, they are quite optimistic about their future outlook in India.

According to CLP Group Chairman Michael Kadoorie, loss from Indian business has increased to HK$212 million in the first half of 2013 from a loss of HK$19 million in the same period a year ago.

The Group attributes the loss to availability of fuel, for both coal and gas, which has been the utmost concern for thermal power plants and the power sector as a whole. These issues are not unique to our business, as they are affecting the Indian power sector at large. Kadoorier said, "While the underlying profitability of our gas-fired plant at Paguthan is protected under the existing power purchase agreement (PPA), we have seen severe impacts on our coal-fired power station at Jhajjar, where the inadequate, irregular and poor quality of coal deliveries from Coal India have impeded the plant's operational and financial performances." However he added that the company has continued to work with relevant government authorities and officials across all levels to secure additional supplies of coal. CLP has got approval for the import of 1.7 mt of coal up to May 2014 representing about a third of its requirements.

Future take
Going ahead, CLP India would primarily focus on renewable energy until and unless its Jhajjar project revives. "The focus is to manage our investment that are on improvement of the performance of Jhajjar project, which we believe we have started doing this year from July. Once we turn that around we hope then we will be in a position to ask for further growth capital from our shareholders," said Rajiv Mishra, Managing Director, CLP India. Performance of power plant at Jhajjar continued to be impacted by coal shortages, with only one of its two units running during the first half of 2013. As a result, JPL's eligibility to earn capacity charges was affected, as the plant operated at less than 40 per cent availability. JPL was unable to meet its financial covenants and CLP India had to inject funds through shareholder loans, recognising the positive fundamentals of JPL. The company has been exploring and pursuing various solutions to address the situation and there have been positive developments. The company believes that the situation will improve in the second half of 2013.

CLP's wind energy portfolio in India performed well in the first half of 2013. It has commissioned the Bhakrani (54.4 MW) and Sipla (50.4 MW) wind projects in the state of Rajasthan. It has also decided to invest in the Jath wind project (130 MW) in Maharashtra with a target commissioning it by December 2014. After completion of this project, the wind portfolio in India will grow beyond 1,000 MW. On its development of Vung Ang II, CLP reported that it has come to a critical stage whereby we are negotiating with the government on tariff levels and US dollar payment guarantee.

Analyst's take
The global rating agencies are of the opinion that as a group CLP rating was unaffected by the first half of 2013 results, but financial headroom is reducing. Moody's Investors Service says that first half of 2013 results of CLP Holdings Limited (CLPH) will have no immediate impact on the company's A2 issuer rating but financial headroom is reducing due to prolonged weak performance in Australia and India.

"CLPH's Australian operations remained under pressure owing to the difficult market conditions and increasing operating costs. Moreover, the ongoing coal shortages in its Jhajjar plant in India constrained the plant availability in the first half," says Ivan Chung, Moody's Vice President and Senior Credit Officer, and also Moody's Lead Analyst for CLPH. He added, "The lingering challenges in both markets make it difficult to materially turn around these operations in next 12 months." The company's Australian operations reported a loss of HK$45 million, before one-off items, compared with a profit of HK$268 million in 1H 2012. "Nonetheless, the stable Hong Kong operations and its growing China business serve as a buffer against the poor performance of CLPH's overseas business," says Chung. The Hong Kong operations reported a modest growth in earnings of 8.1 per cent, supported by the stable regulatory regime. Earnings from its China business grew 12.7 per cent, driven by lower coal prices.

However, Standard & Poor believes that the reorganisation does not impair the credit quality of CLP. "The company's above-average business profile continues to be supported by a favourable regulatory environment, CLP's de-facto monopoly in its service areas, and solid operating performance at CAPCO. Meanwhile, a well-defined tariff-setting mechanism supports CLP's capital programme, assuring ongoing financial and cash flow stability. Together, these factors continue to justify the company's current rating," the rating firm stated in its latest report.

MANAGEMENT'S
Naveen Munjal
, Director Commercial
Project development in conventional energy segment is facing multiple challenges. How are you preparing your strategy ahead? What is the long-term plan of CLP in conventional energy?
Project development in the conventional space is indeed facing myriad challenges. These challenges include severe fuel supply constraints, issues with land acquisitions, environmental permitting and financing.

As one of Asia-Pacific's oldest and largest utilities, we are a long-term investor with keen interests in both conventional and non-conventional power opportunities. Our strategy for the Indian market is no different and we will continue to commit ourselves to opportunities that best align with our business philosophy and objectives.

Mahesh Makhija, Director BD Renewables
CLP is making good progress in the wind energy segment. What are your plans for renewable segment? What are the long-term plans in renewable segment in India?
O&M is one of the most important functions in energy sector. What kind of technological advancement you have achieved in CLP?
O&M is not primarily focused on technological advancement, but more about optimising the various technologies of the power plants within the portfolio. CLP India's O&M experience helps us to optimise production, by increasing availability as well as efficiency of the installed generation capacity. As we perform maintenance, especially on a plant in its middle life, we can improve technologies that lead to lower parasitic or auxiliary power consumption. And upgraded turbine components can optimise thermal efficiency as well as increase design power output. But the core of our good O&M is the world-class preventive maintenance that keeps availability high, thus forced shut-downs low.

Gopinath Govindan, Director HR
What kind of HR policy is under practice at CLP?

While we did have challenges on the skilled manpower front during the initial years, but over the years, we have built a pool of very capable power professionals and a strong employer brand.

We work on the development of home-grown talent through the hiring and training of graduates with engineering and management qualifications. As part of this programme, the graduates are put through a customised year-long training comprising six months of class room training and another six months of on-the-job training. Exposure to best-in-class practices followed at CLP assets (both in India and abroad) ensures that our people stay updated at all times.

Attrition has always been a major problem these days. How much attrition does CLP face? The attrition that we face is generally at lower levels where employees find opportunities closer to their home towns or go for higher studies. Our voluntary turnover rate for 2012 was 6.2 per cent.

What kind of HR initiatives are you taking ahead?
Engaging with employees and retaining them exists within our framework, which is multi-dimensional. We also look at on-the-job development, personal development, fun at work-¡place, opportunities for cross functional as well as cross cultural interaction and also allowing employees to be involved in community acti¡vities.

In the second half of 2013, CLP India will focus on:

  • Moving JPL towards a long-term and sustainable financial viability by establishing a framework for the procurement of imported coal with the Government of India and by continuing to work with other stakeholders to improve the availability of domestic coal; and
  • Continuing longstanding efforts to secure adequate, reliable and reasonably-priced gas supplies for Paguthan from domestic sources.
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