‘Long-term volume to double'
PTC India (PTC) was established in 1999 as a government of India initiated public-private partnership to develop a commercially vibrant power market in the country. To assess the current scenario in the power sector and how it impacts the company, Capital Market's Rushit Pareikh spoke with T N Thakur, Chairman & Managing Director, PTC India. Excerpts:
What is the volume growth in trading of power?
Trading volume was up about 34% at around 24,481 million units (MU) in the fiscal ended March (FY 2011) over FY 2010.
What is PTC India’s growth estimate for FY 2012? Given the uncertainty and delay in the power sector, how can you be sure of FY 2012?
We expect volume growth of about 25-30% in FY 2012. Short-term volume always remains difficult to predict. But, based on past experience, we can say that we will definitely grow. We expect our long-term traded volume, which was around 1,274 MU end March 2011, to double by FY 2012 based on the various power projects that will become operational in FY 2012.
Which power projects do you expect to be operational in FY 2012 and in FY 2013?
The power capacity of PTC India, as per the power-purchase agreements (PPAs) signed with developers, stood at around 15,220 MW including 1,416-MW crossborder projects in FY 2011. We expect about 1,354 MW of power projects to get commissioned in FY 2012. These include the 704-MW Jaypee Karcham hydro project and the 100-MW tolling projects of Everest Power Pvt Ltd, both in Himachal Pradesh, and the 200-MW Simhapuri Energy and the 160-MW Meenakshi power projects, both based on imported coal, in Andhra Pradesh. We expect about 4,613 MW of power capacity to be commissioned in FY 2013. All these projects have had their financial closure. They are fuel-backed projects. We do not expect any delay in commissioning of these projects.
Though there is some uncertainty among some state electricity boards (SEBs), we expect volume to definitely grow in FY 2012.
Will the reluctance SEB to buy higher-cost power increase trading volume or reduce it?
The concerns of SEBs are not new. They are there since we started our business. The difference between now and the past is the high fuel costs, which the SEBs are not able to absorb due to various reasons. Just imagine in states like TamilNadu and Rajasthan, the power tariff per unit has not been revised even once in the past five years while all costs related to generation of power have been increasing.
Various SEBs like in Delhi have got permission to increase tariff, but only gradually. However, the problem still remains as these hikes take care of past losses. Current losses are piling up. These are only temporary solutions. We want reforms. So unless SEBs are allowed to pass on the high fuel cost impact, they will not buy power at higher rate and will resort to huge power cuts, which can affect our volumes.
Have there been cases of power producers delaying commissioning of projects due to fuel costs?
We do not expect any significant delays from power developers with whom PPAs have been signed by PTC India so far. However, the realisation of these power producers has come down. The main reason remains lack of evacuation of power by SEBs. Thus, developers have concerns about realisation.
PTC India improved its margin last year. So our margin has nothing to do with how much margin the developer makes. The more we trade power, the more the demand for power, better will it be for us.
How has PTC India been able to increase market share?
PTC India has a market share of about 51% in the power trading business. The main reasons have been the first-mover advantage and the innovations that we have done along the way. The bouquet of services that we provide is unparalleled. We mitigate the risks of the sector and, at the same time, provide a platform for buyers and sellers to meet and conduct business. We try and ensure that power reaches every deficit corner of the country.
Why can a developer not enter into direct contract with SEB? Why does he need to go through PTC?
This question has remained with us from the day we began the concept of trading. In any market, there are always options available. Bilateral trade is one. But the risk associated with this sector has to be understood. Buyers and sellers have understood this risk over a period of time. Thus, they conduct business through us. I will illustrate this through an example. First is that the developer and the SEB could be in different locations and they approach PTC India to be the mediator. Second, the company is able to bring in the appropriate rate. Third, we are able to bear the entire credit risk. In return, a trading margin is charged by PTC India.
What is the possible and real risk due to SEB default, restructuring or delays? How much risk including credit risk flows to PTC India? How can you control this risk?
Since our inception, we have not seen any default from SEBs. Neither do we expect that to happen. There can be and have been delays from SEBs in their payments. For long-term trading volume with SEBs, we always enter into a contract through a 30-day rolling letter of credit (LC). If payment is not received within 30 days, we stop supply and revoke the LC. For short-term volume, we provide a credit period of about seven days. We stop supply if the payment is not received on the seventh day.
We also provide a back-to-back guarantee to the developer. It is contract-specific. On short-term volume, we receive credit of about 10 days from the developer before making payment. Thus, we enjoy negative working capital of three days in short-term trading.
The concerns about our fate on restructuring of receivables are exaggerated. The average collection period stood at about 42 days in FY 2011, whereas the average payment period was 24 days in FY 2011. This implies about 18 net debtor days. Excluding Tamil Nadu and Karnataka SEBs, the average collection period comes down to about 21 days. This effectively implies a negative working capital cycle.
A 2% rebate is applicable for payment made within seven days from the date of Invoice. A surcharge is levied for payment beyond the due date, which is 30 days from the date of invoice.
PTC India earns a high return on surplus cash as SEBs loose cash discount if they delay payment. Can this trend of SEBs delaying but ultimately paying and PTC India earning high return on temporary deploying cash continue?
If SEBs delay payment, we save our cash discounts and, in fact, charge interest on them. A 2% rebate is applicable for payment made within seven days and a surcharge is levied for payment beyond the due date, which is 30 days for long-term contracts. As this is not our core business, we will be happy if we earn through regular sale and purchase of power. This way the business volume will grow as SEBs will purchase more power if they are able to pay in time, resulting in growth of our business.
The margin improved in FY 2011, because the margin cap on short-term trading increased. Any chance of it reducing again? Why was it reduced earlier and then restored? Can it happen again due to the current environment of SEBs trying to cut costs?
Due to high prices in the short-term power trading market, the Central Electricity Regulatory Commission (CERC) decided to cap the trading margin charged by various traders. Even after imposing the trading margin cap, short-term prices did not ease. It realised that the high tariffs were a result of demand and supply mismatch. Subsequently, in 2010, CERC decided to revise the margin cap to 7 paisa for short-term trades and remove the margin cap on long-term power trading contracts. We do not expect the regulators to revise the trading margin in near future.
Since when did PTC India start realising the benefit of higher margin cap?
The cap from CERC was removed from April 2010. So the positive impact came from Q1 of FY 2011. But the full impact started from Q2 of FY 2011.
There is no cap on the margin for long-term projects as this can be negotiated. On what basis are these negotiations done?
Long-term contracts are on a case-by-case basis, plant load factor, transmission and distribution rates and such other considerations. They are all negotiated one on one and there is no specific format.
What extra risks is PTC India taking to earn higher margin on long-term volumes? How does it mitigate these risks?
The long-term contracts executed by us are usually for the life of the project. Also, the quantum, and, therefore, the volume, of power being handled is very high, increasing the market and offtake risks and also the associated credit risks. Further, the billing cycle for long-term projects is for 30 days, which is longer than for typical short-term transactions.
In case of any default in offtake of power by utilities, PTC India is to divert it to other potential customers. As a result of our marketing strengths, reflected in our market share, we would be in the best position to divert this power to other potential customers. Further, the other risks associated in a long-term contract like delay in commissioning are on back-to-back basis, i.e, whatever has been guaranteed to the buyer is backed by counter-guarantees from the project developers. Also, the credit risks associated with long-term contracts are mitigated by appropriate payment security mechanisms like letters of credit and bank guarantees.
What is the percentage of long-term volume to total traded volume? How will it move in future?
Our long-term volumes including cross-border trade constitute about 35-40% of our total volumes. We intend to increase the contribution of long-term trading volumes to about 60%-70% by FY 2014 through long-term PPAs of more than 15,000 MW that we have executed with various developers. The higher ratio of long-term trading volumes would reduce our dependence on volatile short-term markets.
How are these long-term volumes sold? How is the rate fixed? How does PTC India de-risk project delays by developers if volumes are presold by it to SEBs?
A major portion of the long-term contracts is sold through long-term competitive bids called by state utilities under case-I mechanism. Along with the project developers, PTC India participate in the case-I bids called by these utilities. Recently, we participated in the case-1 bids called by the utilities of Andhra Pradesh and Uttar Pradesh. The tariff to be quoted in the bid is mutually agreed between PTC and the developer before submission of the bid along with the trading margin. We execute a back-to-back agreement with the developer for the project, thus passing on all the associated risks and penalties including those applicable for project delays.
How does the coal business operates? Is it a trading business or a commission business?
Our subsidiary, PTC Energy, has entered into long-term imported coal purchase and sale agreements providing fuel linkage to Indian power plants. It is not on commission basis.
Are there any fund-raising or diversification plans apart from the coal-and-power-project financing already done through subsidiaries?
Apart from the coal-and-project-financing businesses that we have already started, PTC India is also trying to diversify its portfolio to joint development of power projects through PTC Energy. Right now, we do not have any plans to raise funds from the market.
What is the role of PTC Energy?
PTC Energy (PEL) was set up to develop an asset base for generating, supplying, distributing, transmitting and dealing in all forms of energy including import and export of coal, conversion of coal or fuels into electricity and fuel linkages and provide advisory services in the energy sector.
The core investment strategy of PEL is to jointly develop projects to invest as promoter and hold on to investment rather than investing with an intent to exit. It has, accordingly, formulated an investment policy and is pursuing a number of projects in the energy sector.
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