Part IV

PART IV

4. HISTORY AND PROSPECTS

4.1	BRIEF HISTORY OF THE COMPANY
	Southern Electric Power Company Limited (SEPCOL) was incorporated on December 20, 1994 and Certificate for Commencement of Business was obtained on May 22, 1995.
4.2 OBJECT OF THE COMPANY
	The sole object of the Company is to set up and operate power generation projects for generation and supply of the electrical power and perform all acts directly or indirectly related or incidental to the business of the Company.
4.3 SPONSOR PROFILES. Profiles on each of the sponsors are listed below:
	BCHIL-SOUTHERN COMPANY LIMITED
	The project is being sponsored by BCHIL-Southern Company Limited, a joint venture between B.C. Hydro International Transpower Corporation, registered in the Cayman Islands, and Southern Electric Limited (SEL) registered in the Republic of Marshall Islands. B.C. Hydro International Transpower Corporation is a wholly owned subsidiary of B.C. Hydro International Power Development Corporation (BCHIPDC). BCHIPDC is 40% owned by British Columbia Hydro International Limited (BCHIL) and 60% owned by IPC International Power Corporation (IPC). IPC is registered in British Columbia, Canada.
	BCHIL
	BCHIL is a wholly owned subsidiary and the international operations arm of British Columbia Hydro and Power Authority (BC Hydro). BC Hydro is a Crown Corporation, owned by the Government of the Province of British Columbia, Canada. BC Hydro is the principal electric utility of British Columbia, with about 11,000 MW of installed electric generating capacity, including over 1,100 MW of thermal capacity, as well as 70,000 km of transmission and distribution facilities, and serves 92% of the population of the Province. It is also the largest corporation (in terms of assets) in the Province of British Columbia and is the third largest electric utility in Canada. BC Hydro is one of the most efficient utilities in North America (based on the cost of electricity generated) and is rated AA+ by Standard and Poors. BC Hydro is based in Vancouver, and for its last fiscal year reported total assets of over US$ 7.5 billion and annual revenues of over US$ 1.5 billion. BCHIL has operated in Pakistan for five years through the provision of a Utility Management Training Programme to WAPDA and through the installation of monitoring systems to predict reservoir inflows for the Tarbella and Mangla Hydroelectric projects, and through the provision of training programmes to WAPDA.
	SEL
	SEL is a power development company owned by a group of non-resident Pakistani and foreign investors who have set up this company to undertake power projects in Pakistan.
4.4 THE PROJECT
	The Project is a new thermal power generating plant having a gross capacity of 117 MW and a dependable capacity of 112.5 MW. It will comprise 5 diesel engine generators of 23.4 MW each. The total electricity produced by the plant will be sold to WAPDA under a 22 years Power Purchase Agreement signed on November 17, 1994. The Net Capacity of 112.5 MW has been contracted with WAPDA, which will purchase the entire capacity along with energy delivered by the project under the 22 years Power Purchase Agreement at a price of US Cents 6.1 per Kwh for the first ten years which has been announced by the Government of Pakistan. The plant will operate on furnace oil which the Pakistan State Oil Company Limited (PSO) has undertaken to supply under the Fuel Supply Agreement for the same term of 22 years. Payment obligations and performance of WAPDA and PSO under their respective agreements have been guaranteed by the Government of Pakistan under a separate Implementation Agreement. The entire project will be established including engineering, designing, supply of machinery, transportation, erection, construction and commissioning of the Plant, on fixed price, turn key basis jointly by ABB of Germany, Pielstick of France, and Zelin Pakistan (Pvt.) Limited. The diesel engines will be supplied by SEMT Pielstick of France, the Generators, control equipment and Switchyard will be supplied by ABB of Germany. Civil Works including engineering and designing of the Power Plant will be carried out by Zelin Pakistan (Pvt.) Limited. Total cost of the Project including working capital and all necessary pre-operating and other expenses is estimated to be US$ 119.491 million (approximately equivalent to Pak Rupees 4,111 million), which is one of the most competitive of all the power projects being set-up under the private power policy. In order to ensure timely completion and uninterrupted and successful operation of the Project, technically as well as financially, the Company has entered into various agreements, main features of which are as follows:
	a)	Guarantee from Government of Pakistan
		Under the Implementation Agreement signed with the Government of Pakistan (GOP), the Company has been permitted to build, own and operate a power plant of the capacity of 117MW with a Net Capacity of 112.5 MW. Under the Guarantee issued pursuant to this agreement, payment obligations arising out of non-performance of WAPDA and PSO together with the monetary damages arising out of any failure by WAPDA or PSO have been guaranteed.
	b)	Bulk Power Tariff
		Under the Power Purchase Agreement electricity will be sold to WAPDA at the Bulk Power Reference Tariff at an average of 6.1 US Cents (equivalent to Pak Rs. 1.913) per Kwh for the first ten years based on January 1, 1994 prices. Escalation to this tariff is to be applied for variation in fuel prices, devaluation of Pak Rupee and US CPI (inflation) from January 1, 1994.
	c)	Realization of sale proceeds from WAPDA
		A twelve months Letter of Credit, renewable every year, will be provided by WAPDA on the Commercial Operations Date. This unconditional and irrevocable direct-pay letter of credit will be issued by a scheduled Pakistani bank acceptable to the Company and shall provide for draws by the Company on a monthly basis in immediately available funds on presentation of an invoice together with a certificate by the Company. Amount of this L/C shall be equal to the aggregate of two months Capacity and Energy Payments and shall be reinstated to the full required amount within 30 days of any draw therefrom by the Company. At least 10 days prior to the expiration of this L/C or a sub- sequent L/C, WAPDA shall provide a replacement L/C for another 12 months period and this shall continue for entire 22 years period. As an alternative to the above arrangement WAPDA may establish Escrow Account with a Pakistani scheduled bank from which amount payable by WAPDA may be withdrawn by the Company on presentation of monthly invoice and a certificate to be issued by the Company.
	d)	Insulation of Project's revenues against devaluation of Pak Rupee and cross border risks
		Under the Implementation Agreement, the Company has been allowed to open local and foreign currency bank accounts within and outside Pakistan. The power tariff offered by the Government of Pakistan, as part of its policy for private power is indexed for movements of exchange rate of Pak Rupees vs. US Dollars w.e.f. January 1, 1994. The tariff is converted in Rupees, with certain adjustments, at the exchange rate prevailing at Financial Close, and then subsequently indexed against US$/PKR exchange rate through the term of the Power Purchase Agreement. This arrangement will increase the Company's revenues commensurate with the depreciation of the Pak Rupee, thereby enabling the Company to convert them into the same amount of US Dollars, for meeting its Foreign Currency Operating Costs, Debt Servicing Costs and Return on Equity, thus effectively providing insulation to the Company against cross border currency risks.
	e)	Bonus of US Cents 0.25 per KWh
		The Private Power Policy provides for bonus payment of US Cents 0.25 per KWh to projects of over 100 MW capacity in case they are commissioned before December 31, 1997. Since the Project is expected to be commissioned before this deadline, the bonus of US Cents 0.25 per KWh should also be available to the Project in addition to the normal tariff.
4.5 LOCATION
	The Plant is located at a distance of 30 km towards the South of Lahore, on the Lahore-Raiwind Road, 3 km from the Raiwind Railway Junction, where the Sponsors have acquired a piece of free-hold land measuring 48 acres. The 132 KV Raiwind Grid Station of WAPDA is at a distance of 3 km from the site. WAPDA will construct the interconnection/transmission line from the Power Complex to the Grid Station.
4.6 CIVIL WORKS
	Civil Works consist of a powerhouse block housing five diesel generator sets and other auxiliary equipment and shall be 4000 square meters. The main building structure shall be supported of pile foundation. There will be a water distribution pump house, a heavy fuel treatment and distribution pump house, warehouse, workshops, security gate, and administrative building and office block. The Civil Works have been started.
4.7 PLANT & MACHINERY
	The Project is based upon the tried and tested medium speed diesel engine technology. This technology offers low capital costs, higher thermal efficiency, and ease of operations. The Sponsors have selected one of the best known diesel engine brands being manufactured by S.E.M.T., Pielstick of France. These diesel engines have proven their reliability and efficiency over long term operations in similar applications around the world. The generator and control equipment are being supplied by ABB, Germany, while the civil works and the balance of the plant will be provided by Zelin Pakistan (Pvt.) Limited. The entire machinery is brand new and imported. The machinery consists of 5 brand new 428 RPM Diesel Engines fired on RFO, coupled with Generators each of 23.4 MW, along with appropriate low tension and 132 kV switch gear. Electricity is generated at 21 kV and stepped up to 132 kV through two 90 MVA step-up transformers. A spare 90 MVA transformer is available to cater for emergencies. The electrical equipment supplier is ABB, one of the largest international suppliers of power generation equipment in the World. ABB will also act as the EPC contract leader, and will therefore be in charge of all erection/installation works. Suppliers of the diesel generating sets and the electrical equipment are well known and reputable manufacturers. The EPC Contract has been awarded on a fixed-price, date certain, turn key basis to three parties lead by ASS. ASS is an internationally renowned entity that has experience in engineering, procurement and construction of power plants. The three parties will jointly bear responsibility for the engineering, procurement and construction. The total estimated cost of imported machinery is US $ 72.530 million equivalent to Rs. 2,495.807 million. The local machinery consists of Fuel Oil Storage Tanks, Fire Protection and Alarm Systems, Primary Cooling System, Process Steam System, Heating, Ventilation and Air Conditioning System. The total estimated cost of local machinery is US$ 934,000 equivalent Rs. 32.139 million.
4.8 UTILITIES
	a)	Water
		The Plant will have one fresh tank 2500 m3 capacity along with the building pumping and piping facilities. The site has an adequate supply of fresh water for which, deep wells are being sunk. The quality and quantity of water has been tested, and found suitable for plant operations.
	b)	Fuel
		The Plant will use nearly 10,000 tons of Residual Fuel Oil per month, which will be supplied by Pakistan State Oil (PSO) under long-term agreement. The plant will have its own railway siding to unload the fuel which will be transported through special railway trains for the supply of bulk fuel.
	c)	Lube Oil & Greases
		The Plant will consume nearly 75 tons of lubricating oils and greases per month, which will be supplied by PSO under a long-term Agreement.
4.9 PROJECT COST & FINANCIAL ARRANGEMENTS
	The capital cost of the Company has been estimated US$ 119.491 million of which US$ 92.164 million represents turnkey construction costs. A breakup of the capital cost is given below:

ESTIMATED CAPITAL COSTS

	LCY	US $(000) FCY	Total	Equivalant Pak Rupees @34.41 PKR/USD	Actual as on Feb 29, 1996 un audited

Land	1,100		1,100	37,851,716	31,717,204
Railway Siding	1,100		1,100	37,851,716	0
Engineering Procurement and Construction	934	91,230	92,164	3,171,426,635	575,621,992

Civil Works		13,300	13,300	457,661,662	101,721,040
Plant & Machinery - Imported		72,530	72,530	2,495,807,908	473,900,952
Plant & Machinery Local	934		934	32,139,548
Erection & Commissioning		5,400	5,400	185,817,517

Insurance during Construction		1,550	1,550	53,336,509	5,430,120
Project Development	4,000		4,000	137,639,234	66,934,399
Construction Management		2,200	2,200	75,703,433	599,721
Financing Fees & Charges	2,588	4,752	7,340	252,574,180	182,709,699
Vehicles & Other Assets	500		500	17,205,326	8,216,102
Interest during Construction		8,500	8,500	292,490,536
FIXED CAPITAL COST	10,222	108,232	118,454	4,076,079,285	871,229,237
Initial Working Capital	1,037		1,037	35,683,845
CAsh & Bank Balances					368,038,094

—————————————————————————————

TOTAL CAPITAL COST

11,259

108,232

119,491

4,111,763,130

1,239,267,331

====================================================

FINANCING PLAN EQUITY
SPONSORS BCHIL-Southern Company Ltd.	-	12,054	12,054	401,783,460	401,783,460
Sponsors, Directors & Associates	2,259	-	2,259	73,469,860	73,469 ,860
Sub-total:	2,259	12,054	14,313	475,253,320	475,253,320
INSTITUTIONS
SEP Holdings Ltd.		2,230	2,230	76,301,210	76,301,210
ABB Mannheim		2,000	2,000	68,591,400	68,591,400
Crescent Investment Bank Ltd.	4,500		4,500	155,050,200	155,050,200
First Capital Securities Corp Ltd.	1,500		1,500	51,684,000	51,684,000
Public Issue of Shares	3,000		3,000	105,000,000	0
Sub-total:	9,000	4,230	13,230	456,626,810	351,626,810
TOTAL EQUITY	11,259	16,284	27,543	931,880,130	826,880,130

———————————————————————————

DEBT
NDFC/PSEDF	35,000	35,000	1,208,756,500
SANWA Bank Japan	35,000	35,000	1,202,946,500	412,387,201
ANZ Banking Group Paris	21,948	21,948	768,180,000
TOTAL DEBT	91,948	91,948	3,179,883,000	412,387,201

———————————————————————————

TOTAL DEBT AND EQUITY

11,259

108,232

119,491

4,111,763,130

1,239,267,331

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4.10 LETTERS OF CREDIT
	The Letter of Credit amounting US$ 39.569 million, for the entire imported plant and machinery having a value of US$ 72.530 million (see note 4.11) have been established as per the following table

L/C No. & Date Opened By Beneficiary Amount Purpose
(US $)

SCB/411/SEPCL	NDFC	S. E. M. T. Pielstick	15,258,155.00	Supply of Five (5)
February 6, 1996		2 Quai de Seine		Diesel Engines
		B. P. No. 75
		93202 Saint Denis, France

SCB/412/SEPCL	NDFC	ABB Kraftwerke AB	15,690,927.54	Supply of Five (5) of Generators and auxiliary equipment
February 6, 1996		Kallstadter Strasse 1,
		D-6800 Mannheim 31
		Germany

PCB ISL-96/12	Prime	ABB Kraftwerke AB	2,256,231.88
February 12, 1996	Commercial	Kallstadter Strasse 1,
	Bank Limited	D-6800 Mannheim 31
		Germany

PCB ISL-96/13	Prime	Peeraj General Trading Co.	6,363,844.00	Supply of stand-by
February 13, 1996	Commercial	P. O. Box No. 8436		Diesel Engine Sets,
	Bank Limited	Emirates Industrial		balance of Plant and
		Building, Dubai, U.A.E.		Accessories
——————————————————————————————————————
			39,569,158.42

Note that L/Cs for ABB are denominated in German Marks and shown in equivalent US dollars.

4.11	PAYMENTS OF EPC CONTRACT PRICE
	The Engineering Procurement and Construction (EPC) contract is a fixed price; Primarily in US dollars with a smaller component in German Marks. The estimated US dollars equivalent price of the contract is US $ 92.164 million as follows:

		US $ Million
- Imported Plant & Machinery		72.530
- Local Plant & Machinery		.934
- Civil works		13.300
- Erection/Commissioning		5.400
	Total:	92.164
		=====
The above price will be paid as follows:
-Advance payment made:	US$ 19.719
-L/Cs established	US$ 39.569
		59.288
Balance payable During Construction against running bills from following sources:
- ANZ Bank Loan	US$ 20.000
- Sanwa Bank Loan	US$ 12.876
		32.876

	Total:	92.164
		======
	<<RETURN>>

4.12 PROJECT CONSTRUCTION SCHEDULE

The construction of the Project has started with the Effectiveness date of the Engineering,
Procurement and Construction (EPC) Contract. The site development works are scheduled to
be completed by December 1996. The shipments of machinery are to start from November
1996 and be completed in April 1997. The plant foundation are to be completed by January
1997. The power house is to be completed in June 1997 and the balance works by July 1997.
The erection/ installation is to be completed by October 1997. The plant is scheduled to be
tested from November to December 1997 and to achieve full Commercial Operations by
December 1997. The construction activities will be undertaken as per the table given below:

CONSTRUCTION SCHEDULE

Sr. No.	Activity	Shipment Date	Arrival Date	Completion
			at Site	Date

Shipment of 1st & 2nd
Diesel Engine/Generator

November 1996

February 1997

July 1997

Shipment of 3rd& 4th
Diesel Engine/Generator

January 1997

April 1997

September 1997

Shipment of 5th Diesel
Engine/Generator

January 1997

April 1997

October 1997

4.	Completion of Civil Works:
	Foundations	January 1997
	Power House	June 1997
	Balance Civil Works	July 1997

Erection/Installation

October 1997

Testing & Commissioning

November-December 1997

Commercial Operations

December 1997

4.13	DESCRIPTION OF FINANCING ARRANGEMENTS
	Brief particulars of the loans are as follows:

a)	World Bank/PSEDF Debt
	Lenders:	National Development Finance Corporation
	Amount:	US $ 35,000,000 (PKR 1,208 million)
		This loan is re-payable in Pak Rupees.
	Grace Period:	Eight years after Commercial Operations Date
	Repayment:	Repayable in 20 semi-annual equal installments starting
		8.5 years after Project Completion Date.
	Interest Rate:	As per World Bank Guidelines, as follows:
		i) During Construction:
		A rate which is equal to the greater of the sum of the prevailing five-year United States Treasury bond rate and 2.0 per cent, and the sum of the prevailing World Bank Lending Rate and 1.5 per cent;
		ii) During Operations for first 10 years and until the Senior Loan Termination:
		A rate which is equal to the greater of the sum of the prevailing one-year United States Treasury bond rate and 3.0 per cent or the sum of the prevailing World Bank Lending Rate and 2.5 per cent; and
		iii) For the remaining loan period:
		A rate which is equal to the greater of the sum of the prevailing one-year United States Treasury bond rate and 4.0 per cent or the sum of the prevailing World Bank Lending Rate and 3.5 per cent.
	Special Feature:	Subordinated to Senior Debts. 18 year term including 8
		year grace period.
	Security:	a) Second mortgage on project assets.
		b) Pledge of 75% of sponsor's shares for loan term (18
		years).
b)	French Buyers Credit
	Lender:	Australia and New Zealand Banking Group Limited,
		Paris, France
	Amount:	US $ 21,948,000
	Interest Rate:	6.60% per annum
	Re-Payment Terms:	12 years including grace period of 2 years
		Payable in 20 equal semi-annual instalments starting 31 months after the Effective Date i.e. September 30, 1998
	Security:	Repayment Guarantee from National Bank of Pakistan
c)	Commercial Bank Credit
	Amount:	US $ 35,000,000
	Lender:	Sanwa Bank Limited, Japan
	Interest Rate:	LIBOR + 2.6% (Fixed at 7.85% for first disbursement
		tranche of US $ 12 million)
	Re-Payment Terms:	10 years including grace period of 2 years
		Repayable in 16 equal half yearly installments starting six months after commencement of commercial operations.
	Special Feature:	Secured against project assets, without bank guarantee.
	Security:	First charge on Project Assets
	Amount disbursed:	US$12,000,000 as on February 29, 1996.

	Both the above two loan agreements have been duly registered with the State Bank of Pakistan.
4.14 COMMERCIAL OPERATIONS
	Under the EPC Contract, the plant is to be completed, and achieve commercial operations within 22 months after the Effective Date, February 28, 1996. The plant should therefore be fully operational by December 28, 1997. If the Contractor is unable to complete the Project by December 28,1997, he will be liable to pay penalties @ US $ 95,000 per day which will be more than capacity payment which Company will receive from WAPDA on completion. The Company has entered into an Operation and Maintenance (O&M) Contract dated July 28, 1995 with British Columbia Hydro International Power Development Corporation (BCHIPDC), a subsidiary of B.C. Hydro Canada. BCHIPDC will manage, operate, maintain and repair the complete power plant and support facilities within the site from the date of takeover by the Owner. BCHIPDC's fee will be us $ 440,000/- per annum and is indexed to US CPI, as per the mechanism provided in Schedule 6 of the PPA.
4.15	RISK FACTORS
	The major risk factors which may affect the project profitability of the Company are:
	a)	Disruption in supply of fuel
		Failure on the part of PSO to supply fuel shall however have penalties. The performance of PSO has also been guaranteed the Fuel Supply Agreement with PSO by GOP through the Guarantee.
	b)	Major break downs
		The Company has comfort that the Project shall be operated by BCHIPDC who have vast experience in operating thermal power plants and they shall be responsible for repair and maintenance.
	c)	Failure of WAPDA to pay Capacity & Energy Price
		The Company has obtained a Guarantee from the Government of Pakistan, guaranteeing the payment obligations of WAPDA. In addition, WAPDA will open a Letter of Credit in favour of Company, equal to two months of Capacity and Energy payment obligations, at the start of Commercial Operation, to secure payments on timely basis.
	d)	Fiscal Policy
		Changes in the existing Tax Law or levy of any new tax may affect the profitability of the Company. The impact of such changes will however be passed on to WAPDA as a pass through under the Power Purchase Agreement.
	e)	Other Factors
		Natural Calamities and other disturbances may affect the profitability of the Company. The Company has however obtained appropriate insurance to cover such eventualities.