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«TABLE OF CONTENTS DEFINITION, TECHNICAL GLOSSARY AND ABBREVIATIONS FORWARD-LOOKING STATEMENTS RISK FACTORS SUMMARY SUMMARY OPERATING AND FINANCIAL ...»

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The PPA signed with HPSEB for the sale of power generated by the Power Plant, is valid for a period of 40 years i.e. until June, 2043, and extendable for further period of 20 years. A Supplementary Agreement dated February 28, 2003 to the PPA was signed between JHPL and HPSEB to record the accepted completion cost of the Project at Rs 15,500 million and means for financing thereof and for payment mechanism. The HPERC, of its own accord, initiated proceedings in respect of this Supplementary Agreement, and observed that the said Supplementary Agreement resulted in substantial changes in main PPA and hence cannot be entered into without the approval of the Commission. In these proceedings, the Company contended that in terms of the PPA, the tariff payable to the Company has already been settled and agreed upon. However, the Commission took a view that the cost of the project is subject to ‘check of prudency’ and ‘due diligence’ on the part of the Commission. Further, the Commission observed that the capital cost of the Power Plant was yet to be approved by CEA and referred to the Commission. Accordingly, the tariff has not yet been determined. Thus, the Commission, vide its Order dated September 6, 2003, declared the Supplementary Agreement to be void and inoperative, and directed HPSEB and the Company to explore possibility of reducing interest cost through a suitable debt restructuring package within a timeframe of 9 to 12 months. In the mean time the Commission directed the HPSEB to pay to JHPL the sales proceeds realised from BASPA II Project. Thereafter, the Company was directed to file with the Commission the financial package within 15 days of its approval by CEA for orders of the Commission. Further, the Company was also directed to file with the Commission application for determination of tariff within 15 days after the approval of financial package and the modified supplementary agreement. In the meantime, pursuant to the said Order, the Commission is reviewing and monitoring the progress being made by the Company and the status of debt restructuring efforts. HPERC in its recent orders has expressed concern over the delay in the approval of the firm financial package by CEA and has directed to make efforts to expedite the same.

xi Currently, pending the determination of the tariff, HPSEB continue to pay to the Company the revenue realised from sale of energy from the Power Plant as directed by the Commission. Pending this determination, the Company has received payment from HPSEB at the effective rate of Rs. 2.09 per unit calculated based on the actual payment received, as compared to entitlement of Rs. 2.95 per unit (net of rebate) for FY2004, as calculated by the Company in accordance with the provisions of the PPA on the basis of financial package of Rs 15,500 million. Further, for the six months period ended September 30, 2004, the Company has received payment from HPSEB at the effective rate of Rs. 2.25 per unit calculated based on the actual payment received.

In view of the above, the Company’s profitability and liquidity may be impacted in the following manner:

• The Company may have to service an equity and debt of Rs. 4,910 million and Rs. 11,210 million respectively with a tariff computed considering lower equity and debt of Rs. 4,650 million and Rs 10,850 million respectively as approved by HPSEB and GoHP under the financial package of Rs. 15,500 million or any other amount of equity/ debt based on the project cost finally approved by CEA and tariff finalized by the Commission;

• In view of the uncertainty on tariff determination as on date, the interest and dividend paying ability of the Company may be adversely affected;

• HPERC tariff determination will be on a retrospective basis with effect from the date of commencement of commercial operations (COD). The revenues are accrued at tariff computed by the Company under the PPA on the basis of financial package of Rs 15,500 million and in the event of approval of lower financial package and finalisation of a lower tariff, the Company would be required to write off such difference in the year the tariff is finally determined thus adversely and additionally impacting the profitability for that year.

ƒ Under the PPA, the interest cost on the approved financial package is reimbursable by HPSEB. As directed by the Commission, the Company has undertaken the debt restructuring exercise and obtained in-principle approvals from its Lenders to re-align the interest rates to approximately 10.50% p.a. However, HPERC has directed the Company to make efforts for further reduction in interest rate to 9% or less. In the event the Company is unable to further reduce its interest rate, it may adversely impact the final tariff as determined by the Commission.

For more details, please refer to the section titled “Our Business” on page 31 of this Draft Red Herring Prospectus.

2. The revenues from HSPEB are lower than the tariff computed by the Company as per provisions of the PPA resulting in arrears being accumulated. In the event we are unable to realise such arrears, our profitability and/ or liquidity will be adversely impacted There are differences between HPSEB and JHPL in interpretation of the provisions of the PPA, pending finalization of the tariff by HPERC as referred to in Risk Factor I above, such as depreciation (part of capacity charges) and rate of secondary energy, etc. For FY2004 and for the six months ended September 30, 2004, there is arrears accumulation of Rs. 593.69 million and Rs. 339.28 million respectively aggregating to Rs. 932.97 million. The Company has made representations to HPSEB in this regard and is currently in discussions with them.





In addition, JHPL has been receiving payments from HPSEB based on their actual realizations from sale of power, which are even lower than the billing amount accepted by HPSEB. In FY2004 and six months ended September 30, 2004, the arrears on this account aggregated to Rs 336.13 million and Rs 41.74 million respectively.

Out of the arrears mentioned above, Rs. 588.84 million, as on September 30, 2004, is on account of interpretation of provision under the PPA relating to reimbursement of depreciation. The factors contributing to other arrears may cumulate on an ongoing basis. JHPL cannot assure that similar arrears will not occur in the future. The extent and timing of the recovery of these arrears may be impacted by the pending HPERC directives. This may adversely affect profitability, liquidity and cash flow of the Company.

3. The PPA is for a period of 40 years, that is up to year 2043, at which time GoHP has a unilateral right to either purchase the Power Plant or extend the term of the PPA for a further period of 20 years with a first right to purchase power on the same terms and conditions xii Our PPA is for a period of 40 years, that is up to year 2043, and is binding on HPSEB and JHPL. The agreement would expire at the end of 40 years, if not extended by GoHP. The extension can be done for a period of 20 years on the same terms and conditions. During this extended period, HPSEB shall have the first right to purchase power from us on the same terms and conditions as per the PPA. On expiry of 40 years of the PPA, in case GoHP exercises the option to purchase the Power Plant or at the expiry of the extended term of 20 years, on transfer of the Power Plant to GoHP, JHPL will only receive value for the Power Plant as determined by a valuation process provided for in the PPA. Such purchase price may be lower than the then prevailing economic value of the Power Plant. Further, in such events, our current business and operations relating to this Power Plant shall cease to exist.

4. The PPA can be terminated by either side upon triggering of events of defaults as defined in the PPA In terms of the PPA the occurrence of certain events of default by either party would result in the termination of the PPA, unless these events of default are remedied within the specified cure period.

If the PPA is terminated due to HPSEB event of default, then the Company may sell the power to any third party. If the Company is unable to sell the power to any third party, then the Company may require the HPSEB to buy the Power Plant at the buy out price (“Termination Payment”) to be determined by a valuation process provided for under the PPA. The Termination Payment, in this scenario, shall cover the entire outstanding equity and total outstanding debt as per the approved project cost, tax and transfer cost.

However, if the PPA is terminated due to JHPL event of default, then the HPSEB shall have the option to buy the Power Plant. In this scenario, the Termination Payments shall cover the entire outstanding debt as per the approved project cost and 5% of NPV of expected cash flows accruing to the company (after debt serving) for the remainder part of PPA.

In both events, this Termination Payment may not be adequate to cover the then prevailing economic value of the Power Plant.

5. The entire revenue is derived from the supply of power to a single Client We rely on a single customer for all of our income. Under the PPA, we are required to sell the entire power available for sale generated by the Power Plant to HPSEB. Power available for sale is determined after netting off from the power generated, the power to be provided free of cost to the GoHP and power that is consumed in plant operations, transmission and transformation.

HPSEB has incurred financial losses for the period 1999 to 2004 (Source: Annual Report of HPSEB) and is currently making payments to us based on their actual realizations. Any material failure or inability, financial or otherwise, on the part of HPSEB to fulfill its obligations under the PPA would have a material adverse effect on the business and operations of the Company.

6. The Operations of the Power Plant may be adversely affected by any breakdown of key equipment, civil structure and/ or transmission system The breakdown or failure of generation equipment or other key equipment or of a civil structure can disrupt generation of electricity by the Power Plant and result in the performance being below the expected levels. Further, any breakdown or failure of transmission system can disrupt transmission of electricity by the Power Plant to the point of evacuation at Jhakri. These events may result in our inability to generate further power as well as loss of revenues and increased cost towards maintenance.

xiii

7. If power generated by us is not evacuated by HPSEB, our profitability will be adversely impacted as the Company will not be able to claim incentives under the PPA JHPL is required to deliver power generated at the interconnection point located at Jhakri. The evacuation of power beyond Jhakri is the responsibility of HPSEB. In the event of HPSEB not being able to evacuate power beyond interconnection point or HPSEB instructs us not to generate power partially or completely, HPSEB would be required to make payments to us under Deemed Generation limited to Design Energy as per the provisions of the PPA. In such scenario, we shall not be able to claim incentives under the PPA and our profitability may be adversely impacted.

8. Decline in Plant Availability may adversely affect our revenues

The Plant Availability is capability of the Company to make available the plant at a level for generation of energy continuously provided there is availability of adequate supply of water. The average Plant Availability in FY 2004 was 96.80% and 99.54% for the six-month period ended September 30, 2004. Any failure on the part of the Company resulting in low Plant Availability may adversely affect our revenues. For details on revenue computation, please refer to the section titled “Management Discussions and Analysis of Operations and Financial Conditions” on page 55 of this Draft Red Herring Prospectus.

9. The Promoters and the Company are running and operating our first hydro power project The Promoters and Company and we have limited experience in operating a hydro Power Plant and accordingly any inability to effectively manage and operate the power Plant could adversely affect our results of operations and financial conditions.

10. The Company may face competition on termination of the PPA In the recent past a number of independent power plants have been set up across the country. In the event the PPA is terminated prematurely or otherwise, and HPSEB does not or is not required to purchase the Power Plant, there can be no assurance that the Company will be able to enter into similar arrangements and the Company will be exposed to competition. Failure of the Company to compete effectively in this scenario could have a material adverse effect on our business and operations.

11. The occurrence of force majeure events not covered by the PPA and our insurance policies may lead to temporary suspension of operations of the Power Plant resulting in loss of revenue Under the terms of the PPA, on the occurrence of certain events that may be considered as force majeure events, HPSEB has agreed to make certain payments to us notwithstanding the inability of the Company to operate the Power Plant. For further details, please refer to the section titled “Our Business – Selling Arrangements” on page 44 of this Draft Red Herring Prospectus. Payment as determined by a valuation process provided for under the PPA, would also be required to be made for a termination of the PPA due to the occurrence of a force majeure event.

However, events which are not covered as a force majeure event either in the PPA or as insured risks, may lead to temporary suspension of operations of the Power Plant resulting in loss of revenue to the Company. In addition we cannot assure you that the amounts received under our insurance policies would be sufficient to cover the loss or damage suffered. Further, the payment in the event of termination of PPA may not be adequate to cover the then existing economic value of the Power Plant.

xiv



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