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The Cost of Our Power Project And Its Impact On The Tariff Fixation The project cost of Rs. 16,673.36 million including the liabilities on account of payment to SJVNL for Interconnection Facilities and implementation of CAT Plan together amounting to Rs. 426.16 million, has been met out of equity capital of Rs. 4,910.00 million, rupee debt of Rs. 8,854.10 million, foreign currency debt of US$ 43.25 million consisting of buyers credit of USD 40.63 million and foreign currency loan from IDBI of US$ 2.62 million. As against the aforesaid project cost of Rs. 16,673.38 million, HPSEB and GoHP have approved a capital cost of Rs. 15,500 million for the purposes of computing the tariff to be paid by HPSEB to the Company. The capital cost of Rs. 15,500 million (subject to the approval of CEA) has been envisaged to be met out of equity capital of Rs. 4650 million, rupee debts of Rs. 8,815.50 million, foreign currency debt of US$ 43.25 million consisting of buyers credit of USD 40.63 million and foreign currency loan from Indian financial institution of US$ 2.62 million.

Under the PPA, for tariff purposes, return on equity is fixed at 16% p.a. in addition to incentives for Plant Availability with a cap of 2% p.a. and incentives for saleable Secondary Energy of upto 155 MU, with a cap of 10% p.a. return on equity.

The project cost of Rs. 15,500 million has been approved by HPSEB and GoHP, as against the actual project cost of Rs. 16,673.36 million, after disallowing part expenses on account of interest during construction, restoration work related to the damages caused by the flash floods and other items of expenditure. The disallowance so made has resulted into a situation where some part of the equity and debt actually availed of by the Company has not been considered by HPSEB for approval of tariff. This will impact the return on equity of the Company as a part of it will be utilized for servicing the equity and debt not considered by HPSEB for tariff purposes. The revenues of the Company were thus adversely affected by approximately Rs. 150.00 million (subject to finalisation of tariff by HPERC) for the period under commercial operation in FY2004. Such an impact is expected to taper down in subsequent years with the repayment of debt.

The average cost of the rupee debt during FY 2004 was approximately 16.00% p.a. Presently, the payments being received by the Company are less than its entitlement based upon the project cost approved by HPSEB and GoHP, as HPSEB is making payments to the Company linked to the actual realization of HPSEB from its customers. This is being done in accordance with the directions of HPERC. On determination of tariff by HPERC, the arrears, if any, are to be paid by HPSEB to the Company, with interest in accordance with the provisions of the PPA. In order to reduce the gap between the actual payments being made by HPSEB and Company’s entitlement based on the approved project cost and provisions of the PPA, the Lenders of the Company had, on Company’s request, agreed ‘in principle’ to restructure the rupee debt by realigning the interest rates to approximately 10.5% p.a. and by refixing the repayment schedule. Formal sanctions from all the Lenders are in place. The present revenue receipts of the Company are adequate to operate the Power Plant and also to service the debt.

For further details, please refer to the sections titled ‘Risk Factors’ and ‘Our Business’ of this Draft Red Herring Prospectus.

Tariff Fixation Based on the financial package approved by HPSEB and GoHP, subject to the approval of CEA and application of ‘check of prudence’ and due diligence by HPERC, the tariff payable by HPSEB to JHPL, shall be worked out in

accordance with the terms of PPA, which are as under:

The tariff for 88% of the energy (12% being supplied free to GoHP) generated by the Power Plant and delivered to the

HPSEB at Jhakri will comprise following parts:

• Capacity Charges

• Primary Energy Charges

• Incentive for Secondary Energy

• Incentive in case the Plant Availability level is greater than 90% The Capacity Charges shall consist of interest on outstanding loans, depreciation / advance against depreciation and leasing charges in case the Company has taken assets on lease. Full Capacity Charges shall be recoverable if the Plant Availability level equals or exceeds the normative availability level of 90%. In case the Plant Availability is less than 90% the Capacity Charges shall be reduced on pro-rata basis. The payment on account of depreciation and advance against depreciation during the period when the debt is outstanding as per AFP, will be equal to the amount of principal required to be paid in the relevant tariff period / tariff year subject to maximum of 1/12 of the loan components of the capital cost as per the approved financial package. Out of the amount so paid amount worked out at the rate of 4.3% of the capital cost for each full period of 12 months shall be treated as the payment on account of depreciation and the balance as advance against depreciation. After the debt redemption period the advance against depreciation shall be adjusted against depreciation payable by the HPSEB for the future period at a per annum rate of 4.3% of the capital cost. No further payment on account of depreciation shall be made until the entire amount of advance against depreciation is fully adjusted.

The projections for the annual Capacity Charges are required to be submitted to HPSEB by Company before the beginning of a tariff period / year. The annual Capacity Charges divided by 12 shall determine monthly Capacity Charges payable irrespective of generation. However, on an annual Plant Availability of less than 90% pro-rata deduction is envisaged.

The Primary Energy charge consists of:

• Operation and maintenance charge at the rate of 1.25% p.a. of the capital cost as per AFP escalated at the rate of 6% (compounded annually) subsequent to the initial tariff year for first ten tariff years and thereafter escalated based on weighted average index of wholesale prices and consumer prices

• Return on equity at the rate of 16% p.a. of the equity component of the capital cost as per AFP

• Interest on working capital at the SBI lending rate as applicable for the secured loans on the amount of working capital computed in terms of the provisions of the PPA The Primary Energy Charges estimated for the tariff period are to be divided by the Design Energy for the period to arrive at a unit rate of Energy Charges, which will be multiplied by energy generated during a month to ascertain monthly payments.

With regard to incentives for Secondary Energy, the charges for the saleable Secondary Energy for any tariff year shall not exceed 10% return on equity. The per unit rate for saleable Secondary Energy shall be calculated by dividing 10% return on equity with normative saleable Secondary Energy amounting to 155 MU at Jhakri.

In case the Plant Availability level in a tariff year, as determined in accordance with terms of PPA exceeds the normative level of 90%, the Company shall be entitled to an incentive at the rate of 0.35% of equity component of the capital cost as per the AFP for each percent increase in Plant Availability above 90% normative level during the year when Plant Availability is more than 90%. The amount of this incentive payable for any tariff year shall not exceed 2% return on equity.

The tax on income will be payable as an expense to the Company on submission of a tax bill to the HPSEB at least 40 days prior to the required date of payment of such tax / advance tax. The tax liability payable by the HPSEB shall in no circumstances be more than the income tax actually payable by the Company.

The extra rupee liability on account of foreign exchange variation towards interest payment and loan repayment incurred in the relevant year, shall be payable subject to the specified limits as per AFP.

Payment Mechanism The payment is made to the Company on submission of a monthly bill, by JHPL, in the first week of the month for the previous month to HPSEB with jointly signed meter reading. The monthly bill shall include Fixed monthly Capacity Charges, Primary Energy Charges and Secondary Energy Charges. The Company is required to submit supplementary bills for reimbursement of income tax along with the monthly bill for the tax actually paid during previous month. The Company shall submit supplementary bill indicating the difference of foreign exchange variation on interest on foreign debt and foreign loan repayment on actual basis.

A jointly reconciled statement is also required to be submitted by the Company for annual payment / adjustment for Capacity Charges, Energy Charges and incentives, on annual basis. For payment of the monthly bills for each billing month within 7 days from the presentation of the monthly bill, the HPSEB shall be given rebate at the rate of 2.5% of the amount billed and paid. To the extent the HPSEB makes payment after 7 days but within 30 days from the presentation of the bill the HPSEB shall be entitled to a discount of 1% of the amount so billed by the Company. In case of supplementary bills also, the Company shall allow rebate at the above rates for payments within 7 days and within 35 days from the presentation of the supplementary bill to the HPSEB.

The payment of monthly bills shall be made by HPSEB through a confirmed, irrevocable, without recourse to the drawer, revolving Letter of Credit (LC). The amount of LC shall be for 1.5 times of one month’s billing in respect of (a) Capacity Charges for one month billing, (b) Energy Charges for saleable Design Energy for the month of September at applicable tariff for the year, or for the peak monthly bill on half yearly basis. The LC can be assigned to the Financial Institutions/ Lenders for the purpose of getting financial assistance.

The payments by HPSEB to JHPL is backed by Escrow mechanism for which HPSEB has opened an Escrow Account with Punjab National Bank, Shimla who maintains it as agent for JHPL. The Escrow Account is available as security to the Lenders. In accordance with the terms of Escrow Agreement executed on February 25, 2004, the revenue from 31 electrical sub-stations under HPSEB shall be deposited in the Escrow Account.

The payment obligations of HPSEB are further guaranteed by the Government of Himachal Pradesh, which can be invoked in case HPSEB does not make payment of a undisputed bill within 2 months after giving a notice of at least 15 days.

Presently the payment, for the power purchased by HPSEB is being made to JHPL, based on the realization of revenues by HPSEB from sale of Baspa power to its clients during the period from April 15 to October 15 This is the period of peak generation during the year, because of higher water availability. During the rest of the period in a year the power purchased by HPSEB from JHPL is consumed within the state of HP. Pending fixation of tariff by HPERC, during the period from October 2003 to March 2004, the payment was made to the Company by HPSEB at a tariff of Rs. 2.31 per unit (net of rebate), in accordance with the directives of HPERC.

For payment of the monthly bills for each billing month within 7 days from the presentation of the monthly bill, the rebate at the rate of 2.50% of the amount billed and paid has been availed by HPSEB each month in FY2004 and also for the six month period ended September 2004.

During FY 2004 we were entitled to a tariff of Rs. 2.95 per unit (net of rebate) under the provisions of the PPA and the bills were raised accordingly. However, we have received payments from HPSEB, which translate into an average tariff of Rs. 2.09 per unit (net of rebate). The balance amount is receivable from HPSEB subject to necessary adjustments on approval of tariff by HPERC.

For FY 2005, we have submitted our estimate of tariff computation to HPSEB, which translates into an average tariff of Rs. 2.95 per unit and are raising the bills accordingly. Arrears, on account of the above, as determined consequent to tariff finalisation by HPERC, will be paid by HPSEB along with the interest thereon to the Company in terms of the PPA.

Utilization of Revenues

All our cash inflows are deposited in a trust and retention account (TRA), maintained with ICICI Bank, pursuant to the stipulations in the Trust and Retention Account Agreement (TRAA) executed between the Company and the Lenders on May 18, 2001. The TRA is required to be maintained till the Company meets all the debt obligations. The funds so available in TRA are utilized in accordance with the provisions of TRAA, which lays down priority for making payments on account of operation and maintenance (O & M) of the Power Plant, followed by ‘debt service’ in accordance with an ‘Operations budget’ submitted by the Company duly approved by Lenders’ engineers and the lead lender. Subsequent to the utilization of funds for such budgeted expenses, the TRAA envisages creation of reserves equivalent to the projected expenditure during specified period on various heads, like 1 month of O & M expenses, 6 months of debt service reserve, major maintenance reserve, insurance reserve, tax reserve and distribution holdings account etc.

Our Results of Operations

HPSEB has notified the commissioning of the first unit on May 24, 2003, second unit on May 29, 2003 and third unit on June 8, 2003. The actual generation of electrical energy, net of 12% free power to GoHP and the status of Plant

Availability during FY 2004 and for the period ended September 30, 2004 is as under:

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