Mr. T.N.Thakur

What is the volume growth in trading of power does the company expect in FY'12. Given the uncertainty and delay in power sector, how the company can be sure for FY'12.

Trading volume for FY'11 stood at around 24481 Million Units (MU), which was up by about 34% y.o.y. For FY'12, we expect volume growth of about 25-30%. Short term volume always remains difficult to predict, but based on our past experience, we can say that we will definitely grow. We expect our long term traded volume which stands around 1274 MU as on Mar'11 to double by the year end Mar'12, based on the various power projects which will be operational during FY'12.

Could you please elaborate more in terms of short term, long term volume growth broad breakup and which are the power projects which you expect to be operational in FY'12 and further in FY'13.

As on FY'11, PPA capacity signed by the company stands around 15220 MW including 1416 MW cross border projects. For FY'12, we expect about 1354 MW of power projects scheduled to get commissioned which includes Jaypee Karcham Hydro project of 704 MW in Himachal Pradesh, and other tolling projects of Everest Power Pvt Ltd of 100 MW, Simhapuri Energy and Meenakshi power both based on imported coal power projects in Andhra Pradesh of 200 MW and 160 MW respectively. For FY'13, we expect about 4613 MW of power to commission. All these projects have the financial closure and are fuel backed projects and we don't expect any delay in commissioning of these projects. These are some of the projects about whom we have been speaking for the last few years and now at the stage of commissioning and you will see them on ground.

For short term, as I mentioned above even though there is some uncertainty among some of the SEB's, yet we expect volume to definitely grow in FY'12.

Will SEBs not buying higher cost power will increase trading volume or reduce it? I mean could you explain the implications of SEB's reduction of trading volume due to higher costs of power.

The concerns on the SEB health side are not new; they are there since we have started our business. The difference between now and the past are the high fuel costs which the SEB's are not able to absorb due to various reasons. I mean just imagine in States like TamilNadu and Rajasthan, the power tariff per unit has not been revised even once in the past 5 years while all costs related to generation of power have been increasing.

Various SEB's like in Delhi have got permission to increase the tariff but only gradually, however, the problem still remains as these hikes takes care of past losses but the current losses keep piling up. These are only temporary solutions. We want reforms. So unless SEB's are not allowed to pass on the high fuel costs impact, they will not buy power at higher rate and will resort to huge power cuts which can affect our volumes.

Has there been any case or it might be that the power project is ready but due to higher costs and other fuel costs, the power producers are delaying or making loss like the one, which we are seeing with merchant power producers. I mean how the situation at the developer's side is and how that can affect PTC.

In the PPAs signed by PTC so far, we do not expect any significant delays. However, as you must have seen the realization of these power producers have come down. The main reason remains lack of evacuation of power by SEBs. Thus the developers have the concerns regarding realization.

As far as PTC is concerned, if you see even in last year, we have improved our margins. So our margin has nothing to do with how much margins the developer makes. The more we trade power, the more be the demand of power; the better will be for us.

How is the company been able to hold on and increase market share? What factors tilts decisions in its favor?

PTC today has a market share of about 51% in power trading business. The main reason has been the first mover advantage alongwith 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 in every deficit corner of the country.

Sometimes I wonder why the PTC India must ever exist. I mean why can't a developer enter into direct contract with SEB and why it 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 always there but the risk associated with this sector also has to be understood and buyers and sellers have understood this risk over a period of time and thus they conduct business through us. I will illustrate this through an example; first is that developer and SEB could be in different locations and they approach PTC to be the mediator; second is that PTC will be able to bring in appropriate rate and third is that we will be able to bear the entire credit risk. In return a trading margin is charged by PTC.

What is the possible and real risk of SEB's default/restructuring/delays and how much risk including the credit risk, flows to PTC? How can it control this risk? Market is really worried about this.

Since our inception, we have not seen any default from SEB's and neither have do we expect that to happen. There can be and have been delays from SEB's in their payments. For long term trading volume with SEB's we always enter into a contract through a 30 days rolling LC and if the payment is not received on 30 days of outstanding payments, we immediately stop the supply and revoke the LC. On short term volume we provide a credit period of about 7 days to SEB's and we stop supply if the payment has not been received at most on 7^th day.

As far as my working capital requirement is concerned on long term, we also provide a back to back guarantee to developer on similar grounds with SEB's and is contract specific. On short term volume we receive credit of about 10 days from developer before making payments, thus we enjoy negative working capital of 3 days in short term trading.

The concerns raised by the market voices regarding what will happen to us if there is a restructuring of receivables are exaggerated. Let me share some facts. The average collection period in FY11 stood at about 42 days, whereas the average payment period stood at 24 days, thus implying a net debtor days of about 18 days. If one excludes Tamil Nadu and Karnataka SEBs the average collection period comes down to about 21 days. This effectively implies a Negative working capital cycle.

Further, As per the contracts 2% rebate is applicable for the early payments made within 7 days from the date of Invoice and a surcharge is levied for payments beyond the due date, which is 30 days from the date of Invoice.

It is said you earn high return on your surplus cash if SEBs delay payment as they loose cash discount. Can we expect this trend to continue (this trend of SEBs delaying (but ultimately paying) and you earning high return on temporary deploying cash).

If the SEBs delay in payment, then we save our cash discounts and infact charge interest on them. As per the contracts 2% rebate is applicable for early payments made within 7 days in short term and a surcharge is levied for payments beyond the due date which is 30 days in long term contracts. But as this is not our core business, we will be happy if we were to earn through regular sale and purchase of power, that way the business volumes will grow as the SEBs will purchase more power if they are able to pay in time resulting in growth of our business.

In FY 2011, margins improved because margin cap on short-term trading was increased. Any chance of reducing it again? Why was it reduced earlier and then restored back? Can it happen again due to current environment of SEBs trying to cut costs?

Because of the high prices in the short term power trading market, CERC decided to cap the trading margins being charged by various traders. Even after imposing the trading margin caps the short term prices did not ease. They realized 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 the short term trades and removed the margin caps on the long term power trading contracts. We don't expect the regulators to revise the trading margins in near future.

From when exactly the company started realizing the benefit of higher margin cap?

The cap from CERC was removed from April'10 onwards, so the positive impact came from Q1 FY'11 onwards, but the full impact of the same started from Q2 FY'11 onwards.

There is no cap on margin for long-term volumes tied up from new projects as they can be negotiated. On what basis these negotiations are done?

Long term contracts are on case to case basis, PLF, T&D rates and such other considerations. They are all negotiated on one on one basis and there is no specific format for the same.

What extra risks PTC is taking for earning higher margins on long-term volumes? How does it mitigate these risks?

The long term contracts executed by the company are usually for the life of the project. Also the quantum and therefore the volume of power being handled is also very high in the case of long term contracts, thus increasing the market / off-take risks and also the associated credit risks. Further, the billing cycle in long term is also for 30 days which is longer than the typical short term transactions done by the company.

In case of any default in off-take of power by the utilities, PTC would try and divert the power to other potential customers. Because 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 Letter of Credit and Bank Guarantees.

What is the current % of long-term volume to total traded volume and how will it move in future depending on the company's expectations on project completions?

Our long term volumes, including the 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 FY14 through the long term PPAs, of more than 15000 MW, that we have executed with various developers. Higher ratio of long term trading volumes would reduce our dependence on the volatile short term markets.

How these long-term volumes are sold? On long-term basis or short term basis? How is the rate fixed/vary? What risks of project delays and problems at developer end PTC is taking if volumes are presold?

A major portion of these long term contracts are sold through long term competitive bids called by state utilities under Case – I mechanism. PTC along with the project developers participate in the Case – I bids called by these utilities. Recently we have participated in the Case – 1 bid called by the utilities of Andhra Pradesh, Uttar Pradesh, etc.. 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 the coal business operates, it's a trading business or commission business?

PTC Energy Limited has entered into long term imported coal purchase and sale agreements providing fuel linkage to Indian power plants and is not on commission basis.

Any fund raising or further diversification plans (apart from the coal and power project financing already being done through subsidiaries?

Apart from the coal and project financing businesses that we have already started, the company is also trying to diversify its portfolio to joint development of power projects through our subsidiary PTC Energy Limited. Right now PTC does not have any plans to raise further funds from the market.

Kindly share us some details regarding your subsidiaries, your investments in them and current progress on their businesses.

PTC India Financial Services Ltd (PFS)

PFS is an Indian non-banking finance institution promoted by PTC to make principal investments in, and provide financing solutions for companies with projects across the energy value chain.

As on 31 March 2011, PTC holds 60% of equity in PFS and rest with institutions like Goldman Sachs, Macquarie, LIC, SBI, Capital International and Public. In mid 2010, RBI has classified PFS as "Infrastructure Finance Company" which will help PFS to raise more cheaper funds from market and in pursuant to same PFS raised funds in FY 2010-11, through issuance of Infrastructure Bonds with benefits of Section 80 CCF of Income Tax Act 1961.

On the resource mobilization front, PFS has signed ECB Agreement with DEG and IFC for USD 26 Million and USD 50 Million respectively, which is exclusively for renewable energy projects.

As on 31 May 2011, PFS has sanctioned debt to power projects amounting to Rs 3,500 Crore which will help to add more than 10,000 MW in coming years with a outstanding disbursal of approx Rs 750 Crore. Company has also committed investment of Rs 564 Crore in form of equity in 10 companies with a disbursal of Rs 458 Crore which will help to add more than 3200 MW capacity.

PFS has recently announced its annual results for FY 2010-11, wherein the Company posted PAT of Rs 37.03 Crore which was 45.48% higher than the PAT of FY 2009-10; its operating income also grew by 162% to Rs 103.68 Crore.

PTC ENERGY LTD (PEL)

PEL was setup with an with an objective to develop asset base taking in to its sphere the business of generation, supply, distribution, transmission and dealing in all forms of energy including import and export of coal, conversion of coal/ fuels in to electricity, fuel linkages and provide advisory services in energy sector and energy efficiency.

To further its objective, the core investment strategy of PEL is to jointly develop projects with a view to invest as promoter and hold on to investment rather than investing with intent to exit. PEL has accordingly formulated an investment policy and is pursuing a number of projects in the energy sector. PEL has also made a strategic investment of Rs. 2340 lakhs for development of wind power through joint venture route.

Long term fuel linkages, particularly for coal based power projects is important as the fuel supply disruptions have been a major challenge for the project developers. PEL has entered in to this business avenue to play the role of fuel intermediation, thus acquiring a position of strength for tying up long-term fuel supply. To expedite fuel intermediation business to meet up the fuel deficiency faced by utilities/clients, PEL is actively engaged in import of coal. In FY10 they traded 1.07 lakhs MT and in FY 11 they traded about 2.80 Lakhs MT of coal.

In addition to above, the Company has tied up imported coal sale and purchase of 24.6 lakhs MT per annum for 5 years. During the current year there is expected to be 4-5 fold increase in above business.