Information Memorandum February 2010

Contents
1. EXECUTIVE SUMMARY .............................................................................................................................. 11

1.1 1.2 1.3

Transaction Overview ................................................................................................................. 11 Investment Environment in Pakistan .......................................................................................... 12 Pakistan Energy Sector Overview ............................................................................................... 13

1.3.1 Power Sector............................................................................................................................... 13 1.3.2 Regulatory and Institutional Framework ................................................................................... 14 1.4 1.5
2.

The Project .................................................................................................................................. 15 The Financials .............................................................................................................................. 16

TRANSACTION OVERVIEW ....................................................................................................................... 18

2.1 2.2 2.3 2.4 2.5 2.6

3.

Introduction ................................................................................................................................ 18 Project Status .............................................................................................................................. 18 Current Status ............................................................................................................................. 19 Way Forward ............................................................................................................................... 19 Capital Structure ......................................................................................................................... 20 Communication with the Company ............................................................................................ 21

INVESTMENT ENVIRONMENT IN PAKISTAN ....................................................................................... 22

3.1 3.2 3.3 3.4

Introduction ................................................................................................................................ 22 Political Situation ........................................................................................................................ 22 Legal System................................................................................................................................ 23 The Economy............................................................................................................................... 23

3.4.1 Key Highlights of FY2009 ............................................................................................................ 24 3.4.2 Exchange Rate ............................................................................................................................ 25 3.4.3 Credit Rating .............................................................................................................................. 25 3.5 3.6 Capital Markets ........................................................................................................................... 25 Policy Incentives for Foreign Investors ....................................................................................... 27

3.6.1 Investment Incentive Package ................................................................................................... 28 3.6.2 Exchange Control ....................................................................................................................... 29 3.7 Tax Regimes ................................................................................................................................ 29

3.7.1 Tax Rates .................................................................................................................................... 29 3.7.2 Withholding Tax ......................................................................................................................... 30 ii

3.7.3 Inter-Corporate Dividend Tax .................................................................................................... 30 3.7.4 Unilateral Relief.......................................................................................................................... 30 3.7.5 Tax Treaties ................................................................................................................................ 31 3.7.6 Capital Gains Tax ........................................................................................................................ 31
4. PAKISTAN ENERGY SECTOR .................................................................................................................... 32

4.1

Energy Sector Overview .............................................................................................................. 32

4.1.1 Oil ............................................................................................................................................... 32 4.1.2 Gas.............................................................................................................................................. 35 4.1.3 Coal ............................................................................................................................................ 36 4.2 Power Sector ............................................................................................................................... 37

4.2.1 Installed Generation Capacity .................................................................................................... 37 4.2.2 Structure of Power Sector.......................................................................................................... 38 4.2.3 National Transmission and Despatch Company ........................................................................ 39 4.3 Independent Power Producers ................................................................................................... 41

4.3.1 IPP Fast Track Initiative: ............................................................................................................. 43 4.4 4.5 RPPs............................................................................................................................................. 43 Power Sector Demand vs Supply Dynamics ................................................................................ 44

4.5.1 Demand Patterns ....................................................................................................................... 46 4.5.2 Sector Demand........................................................................................................................... 46 4.5.3 Regional Demand ....................................................................................................................... 46
5 POWER SECTOR REGULATION ................................................................................................................ 47

5.1 5.2 5.3 5.4 5.5 5.6 5.7

6.

Regulatory Framework................................................................................................................ 47 Provincial Representation at NEPRA ........................................................................................... 47 Institutional Framework.............................................................................................................. 47 NEPRAs Role and Responsibilities .............................................................................................. 48 Licenses ...................................................................................................................................... 49 Tariffs .......................................................................................................................................... 49 Transition to Competition ........................................................................................................... 50

THE PROJECT ................................................................................................................................................ 51

6.1 6.2

Grange Power Limited ................................................................................................................ 51 Objective of the Company .......................................................................................................... 51 iii

6.3 6.4 6.5 6.6

The Project .................................................................................................................................. 52 Plant Site ..................................................................................................................................... 52 Plant Capacity ............................................................................................................................. 53 Engineering Procurement & Construction Agreement ............................................................... 54

6.6.1 Layout Plant and Buildings ......................................................................................................... 54 6.6.2 Machinery and Suppliers ............................................................................................................ 55 6.6.3 EPC Timeline............................................................................................................................... 57 6.6.4 EPC Costs .................................................................................................................................... 57 6.7 6.8 Tariff Determination ................................................................................................................... 59 Tariff Structure ............................................................................................................................ 60

6.8.1 Capacity Purchase Price ............................................................................................................. 60 6.8.2 Energy Purchase Price ................................................................................................................ 60 6.8.3 Tariff Adjustments to CPP Components .................................................................................... 60 6.8.4 Adjustments to EPP Components .............................................................................................. 61 6.9 6.10 Taxes ........................................................................................................................................... 61 Summary of Key Agreements and Contracts .............................................................................. 62

6.10.1 Power Purchase Agreement ................................................................................................... 62 6.10.2 Implementation Agreement .................................................................................................... 63 6.10.3 Fuel Supply Agreement ........................................................................................................... 65 6.10.4 Engineering & Procurement Contract and Construction Contract ......................................... 66 6.10.5 Project and Construction Management Contract ................................................................... 67 6.10.6 Operation and Maintenance Contract .................................................................................... 68 6.10.7 Local Loan Agreement ............................................................................................................. 68
7. PROJECT SPONSORS AND CONTRACTORS .......................................................................................... 70

7.1

Ownership and Control ............................................................................................................... 70

7.1.1 Shareholder Control ................................................................................................................... 70 7.1.2 Board of Directors....................................................................................................................... 70 7.2 Shareholder Profiles.................................................................................................................... 71

7.2.1 Mr. Assad Sheikh ........................................................................................................................ 71 7.2.2 Mr. Shuja Hussain ....................................................................................................................... 72 7.2.3 Mr. Amjad Faquir ........................................................................................................................ 72

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7.2.4 Grange Holdings Group .............................................................................................................. 74 7.2.5 Albario Engineering Pvt. Ltd ....................................................................................................... 78 7.2.6 China National Machinery & Equipment Import & Export Corporation .................................... 80 7.3 Contractor and Consultant Profiles............................................................................................. 82

7.3.1 Korea Plant Service and Engineering Co Ltd ............................................................................... 82 7.3.2 Scott Wilson ................................................................................................................................ 85 7.3.3 AbacusConsulting ....................................................................................................................... 87 7.3.4 Haidermota & Co. ....................................................................................................................... 89
8 FINANCIALS.................................................................................................................................................... 91

8.1 8.2 8.3

Overview ..................................................................................................................................... 91 Tariff Determination ................................................................................................................... 91 Technical and Operational Assumptions .................................................................................... 92

8.3.1 Project Cost................................................................................................................................. 92 8.3.2 Capital Structure ......................................................................................................................... 92 8.3.3 Capital Expenditure Plan ............................................................................................................ 92 8.3.4 Project Financing ........................................................................................................................ 93 8.3.5 Operation and Maintenance Costs: ............................................................................................ 93 8.3.6 Projected Generation ................................................................................................................. 94 8.3.7 Fuel Consumption Rate .............................................................................................................. 94 8.3.8 Fuel Cost ..................................................................................................................................... 95 8.3.9 Insurance .................................................................................................................................... 95 8.3.10 Taxation ................................................................................................................................... 95 8.3.11 Customs Duties........................................................................................................................ 95 8.3.12 PPA Letter of Credit ................................................................................................................. 96 8.3.13 Indexation................................................................................................................................ 96 8.4
9

Financial Analysis ........................................................................................................................ 96

RISK MITIGATION ........................................................................................................................................ 98

APPENDIX A: DETAILED TARIFF SCHEDULE ............................................................................................. 102 APPENDIX B: FINANCIAL MODEL .................................................................................................................. 103

ABBREVIATIONS AND GLOSSARY OF TERMS

Abbreviation Abacus AEPL AHBL AJK ARL bbl/d BOI BOP BP bps Btu CAGR CERIECO cft CGT CHASNUPP CMEC COD Contractors CPI CPP CPPA CSCI DISCO DSCR DSRA E&P EOI EIA EPC EPP FBR FBS FDI Financial Close FSA GDP GENCO GHG GoP GPL GW Description AbacusConsulting Technologies (Private) Limited Albario Engineering (Private) Limited Arif Habib Bank Limited Azad Jammu and Kashmir Attock Refinery Limited Barrels per day Board of Investment Balance of Plant British Petroleum Basis points British thermal unit Compound Annual Growth Rate China East Resource Import and Export Corporation Cubic foot or cubic feet Capital Gains Tax Chashma Nuclear Power Plant China National Machinery and Equipment Import and Export Corporation Commercial Operations Date EPC Contractors referring to CMEC and CERIECO together as E&P Contractor and Construction Contractor, respectively Consumer Price Index Capacity Purchase Price Central Power Purchasing Agency Commission of Social Care Inspection, in UK Government owned Distribution Company unbundled from WAPDA Debt Service Coverage Ratio Debt Service Reserve Account Engineering and Procurement Expression of Interest Environmental Impact Assessment Engineering, Procurement and Construction Energy Purchase Price Federal Board of Revenue Federal Bureau of Statistics Foreign Direct Investment The execution of financing documents and equity commitments that evidence sufficient funding to completely construct and commission the Project. Fuel Supply Agreement Gross Domestic Product Government owned Generation Companies unbundled from WAPDA Grange Holdings Group Government of Pakistan Grange Power Limited Gigawatt vi

Abbreviation GWh HHV HSD HSE HSFO IA IDA IDC IM IMF Income Tax Ordinance IPP IRR ISO

Description Gigawatt hours Higher Heat Value High Speed Diesel Health, Safety and Environment High Sulphur Fuel Oil Implementation Agreement Initial Depreciation Allowance Initial Dependable Capacity Information Memorandum International Monetary Fund Income Tax Ordinance, 2001 as updated in October 2009 Independent Power Producer Internal Rate of Return International Organization of Standardization, referring in the IM to standard plant capacity under specific atmospheric conditions such as ambient temperature (150C), altitude (sea level), pressure (1 bar). Karachi Nuclear Power Plant Karachi Electric Supply Corporation Kilogram Karachi Interbank Offered Rate Korea Plant Service and Engineering Company Limited Karachi Stock Exchange A stock index used as a benchmark to compare prices on KSE over a period of time. Kilowatt Kilowatt hour Letter of Credit Lower Heating Value London Interbank Offered Rate Letter of Interest Letter of Support Liquefied Petroleum Gas Limited used alone to indicate a public limited company in Pakistan Mari Gas Company Limited Million Cubic Feet Megawatt Megawatt hours National Bank of Pakistan National Electric Power Regulatory Authority National House Building Company National Environmental Quality Standards No Objection Certificate National Power Control Center Net Present Value National Refinery Limited National Transmission and Despatch Company vii

KANUPP KESC kg KIBOR KPS KSE KSE-100 kW kWh LC LHV LIBOR LOI LOS LPG Ltd MGCL MMCF MW MWh NBP NEPRA NHBC NEQS NOC NPCC NPV NRL NTDC

Abbreviation O&M OCAC OGDC OGRA OMC PAEC PARCO PEPCO PES PKR plc PME Power Purchaser PPA PPIB PPL PRL PSO Pvt. Ltd PwC Consulting RFF RFO ROA ROE ROEDC RPP SBP Scott Wilson SLCF SNGPL SSGC Tariff Rules Tcf TFF TIE UK USA USD WAPDA WPI

Description Operations and Maintenance Oil Companies Advisory Committee Oil and Gas Development Company Limited Oil and Gas Regulatory Authority Oil Marketing Company Pakistan Atomic Energy Commission Pak Arab Refinery Corporation Pakistan Electric Power Company Pakistan Engineering Services Pakistan Rupee Public limited company in UK Plant Machinery and Equipment NTDC through CPPA Power Purchase Agreement Private Power Infrastructure Board Pakistan Petroleum Limited Pakistan Refinery Limited Pakistan State Oil Company Limited Private Limited used with a private limited company in Pakistan PricewaterhouseCoopers Consulting Running Finance Facility Residual Fuel Oil also referred to as Furnace Oil Return on Assets Return on Equity Return on Equity During Construction Rental Power Producer State Bank of Pakistan Scott Wilson Group plc Standby Letter of Credit Facility Sui Northern Gas Pipelines Limited Sui Southern Gas Company NEPRAs Tariff Standards and Procedures Rules, 1998 Trillion cubic feet Term Finance Facility Times Interest Earned United Kingdom United States of America United States Dollar Water and Power Development Authority Wholesale Price Index

viii

IMPORTANT NOTICE
This confidential Information Memorandum (or IM) has been prepared by AbacusConsulting (the Advisor) solely for information purposes from materials provided to the Advisor by Grange Power Ltd (the Company) and their representatives. Other sources of information are largely secondary in nature, including published data from PPIB, WAPDA and other public sources. No surveys have been conducted to validate the information gathered from secondary sources, and no formal due diligence has been conducted to verify information provided by the designated representatives of the Company, which is assumed to be correct. This Information Memorandum may be distributed by the Company or its designated representatives solely for the use of interested investors and financiers to determine whether they would like to proceed with further investigation into the Project. Use of this IM is governed by the terms of the Confidentiality Agreement executed with each potential investor, which strictly limits the circulation and copying of the information contained in this document. This IM may not be reproduced or used without the prior written approval of the Company or the Advisor for any purpose other than the evaluation of the Project by the recipient. The information contained in this Information Memorandum has been prepared in good faith to assist the recipient in making their own evaluation of the transaction and does not purport to contain all the information that the recipient may desire. In all cases, the recipient should conduct their own investigation and analysis of the Project and of the data in this IM. The Advisor does not assume any responsibility for independent verification of any of the information contained in this IM, including any statements about the prospects of the Project contained herein. Neither the Company nor the Advisor makes any representation or warranty (express or implied) as to the accuracy, fairness or completeness of this IM or the information contained in, or omitted from, this document. Each expressly disclaims any and all liability for representations or warranties (express or implied) contained in, or omitted from this IM or any other written or oral communications transmitted or made available to the recipient in the course of its evaluation of the transaction. This Information Memorandum does not constitute or form part of any offer for sale of the equity interest, nor does it constitute the basis of any contract which may be concluded for such a sale. Only those particular representations and warranties, if any, which may be made to a party in a definitive written agreement regarding the transaction, when, as and if executed, and subject to such limitations and restrictions as may be specified in that agreement, will have any legal effect. This Important Notice also applies in its entirety to any supplements issued subsequently to this IM, whatever form those supplements might take. Without limiting the generality of the foregoing, each potential investor agrees that neither the Company nor the Advisor has any liability in relation to use by any person of the financial projections or other analysis based on the financial model prepared for the transaction.

ix

The statements, financial estimates and projections in this Information Memorandum and other information provided in connection with this reflect various assumptions made by the Company concerning anticipated results and are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Company. Accordingly, no representations are made by the Company or the Advisor and there can be no assurance that such statements, estimates and projections will be realized. The actual results will likely vary from the forecast, and those variations may be material. Neither the Company nor the Advisor makes any representations as to the accuracy or completeness of such statements, estimates and projections or that any forecasts will be achieved. By accepting this Information Memorandum, the recipient acknowledges and agrees to abide by the statements made in this Important Notice with respect to the confidentiality of information in the IM and the constraint on reproducing this IM, in whole or in part. Further, by accepting this Information Memorandum, the recipient shall be deemed to have agreed to the disclaimers made by the Company and the Advisor in this Important Notice, and to have waived, to the fullest extent permitted by law, any and all claims against the Company and the Advisor or any of their directors, agents, advisers, officers or employees, in relation to any matters covered by the disclaimers. This Information Memorandum and any other information provided in connection with this should not be construed as the giving of investment advice by the Company or the Advisor. All information contained in the IM relating to the Company originates from the Company. This Information Memorandum and the Project as a whole have been prepared in compliance with the laws of Pakistan. Investors subject to laws of other countries must comply with such relevant laws. Investors with operations, interests or ownership in other countries should seek their own legal advice to ensure they remain in compliance with their respective laws in relation to this IM and the Project. The Company and the Advisor reserve the right, without prior notice, to change the procedure and process for the investment, or delay or terminate the same, or to terminate discussions with any potential investor, at any time. This Important Notice also applies in its entirety to any electronic copies or information transmitted over the internet.

1. EXECUTIVE SUMMARY

This Information Memorandum has been developed to assist potential investors and financiers in making a decision towards investing in Grange Power Limited.

1.1

Transaction Overview

Grange Power Limited (GPL) is a public limited company based in Pakistan, established with the objective of setting up a state-of-the-art power generation plant in Arifwala, Pakistan, with a gross ISO capacity of 163.35 MW. The IPP is being developed under the Governments Fast Track initiative which allows it to pass certain otherwise necessary procedural steps and achieve completion in a much shorter time period. The Project is at an advanced preconstruction stage: the land has been acquired, tariff determined by NEPRA (at US 12.4778per kWh), Generation License and other necessary approvals obtained from NEPRA and various government departments. On the other hand, EPC agreement has been signed with CMEC and CERIECO with contractual negotiations at the final stage; and other contracts also at advance stages of negotiation. The Management of GPL is currently in the process of organizing the Performance Guarantee, subject to detailed discussions with its lenders following which the LOS shall be issued for the Project by the PPIB. The draft PPA and IA have been provided to GPL for review and expected to be signed in June 2010, along with the FSA which is being negotiated with PSO. Negotiations are underway with a local bank to arrange syndicated project funding for the onshore debt component. Financial Close is expected by July 2010. Commencement of civil works is expected in June 2010 with the COD expected in August 2012. The total project cost is estimated to be approximately USD 218 million, of which 25 percent or about USD 54 million is planned as equity and the remaining USD 164 million shall be arranged as long term loan. The major shareholder in GPL is Grange Holdings Group which currently holds 96 percent of the total number of shares outstanding. The remaining 4 percent are equally held by Albario Engineering (Pvt.) Ltd, Mr. Shuja Hussain, Mr. Assad Sheikh and Mr. Amjad Faquir. The EPC and equipment costs together constitute about 75 percent of the total project cost or USD 164 million. Of this, USD 28 million is estimated as the onshore component and is planned to be arranged through local banks, whereas the offshore cost of USD 136 million shall be organized through foreign banks and financial institutions.

11

1.2

Investment Environment in Pakistan

Pakistan is the sixth most populous nation in the world, with an approximately 164 million inhabitants (2009 estimates).It is strategically located in the South Asian corridor, bordering India, China, Afghanistan, Iran and the Arabian Sea. The Government of Pakistan is in the process of political, economic and institutional reform, with a view to strengthening the economy of the country, eliminating corruption from the government and improving the investment environment in Pakistan. The following table summarizes Pakistans economic performance over the past 5 years: Table 1.1: Pakistan Economic Indicators Economic Indicator Macroeconomics Real GDP Growth Agriculture Growth Manufacturing Growth Population (Million) Per Capita Income( USD) Financial Conditions External Debt Outstanding ( USD Billion) Debt Servicing as % of GDP Forex Reserves ( USD Billion) Budget Surplus/ (Deficit) (USD Billion) Inflation (CPI) Exchange Rate (PKR : USD) KSE-100 Index (as of yearend June 30) Trade Total Exports Current Price (USD Billion) Total Imports Current Price (USD Billion ) Export Growth Import Growth
* Provisional Results Source: Economic Survey of Pakistan 2008-09

FY05 Actual 9.0% 6.5% 15.5 151 733 34.04 4.7 10.9 (5,649) 9.3% 59.8 7450.12 14.3 20.5 16.8% 32.1%

FY06 Actual 5.8% 6.3% 10.0 153 833 35.68 4.8 13.1 (4,556) 7.9% 59.8 9989.41 16.4 28.5 14.3% 38.7%

FY07 Actual 6.8% 4.1% 8.4 156 925 37.36 3.8 12.9 (6,212) 7.7% 60.6 13772.46 13.9 24.9 3.2% 6.8%

FY08 Actual 4.1% 1.1% 4.8 159 1,042 46.3 1.1 15.8 (11,173) 12% 62.5 12289.03 19.0 39.9 12.2% 30.8%

FY09* Provisional 2.4% 4.7% (3.3) 163 1,046 50.1 0.8 11.4 (8,547) 22.3% 78.0 7162.18 14.7 28.9 -3.03% -9.78%

A number of manufacturing and non manufacturing sectors are now open to foreign investors, and this coupled with the resilience the country has shown in the wake of the most testing of economic times, means that the country remains an attractive option for potential investors.

12

1.3 Pakistan Energy Sector Overview

The Government of Pakistan has identified the energy sector in Pakistan as playing a pivotal role in the development and growth of the Pakistan economy. GoP has stated the main objectives of its policy for the Pakistan energy sector as ensuring adequate, secure and cost effective supplies; efficient utilization of resources; and minimization of negative environmental impacts. The key sources of primary energy in Pakistan are oil, gas and hydroelectricity. Petroleum products and natural gas account for almost 80 percent of commercial energy, hydroelectricity for about 11 percent and the rest is made up by coal, liquefied petroleum gas (LPG) and nuclear energy. 1.3.1 Power Sector

Historically, the power sector in Pakistan has consisted of two major state-owned utilities: WAPDA and KESC which have operated largely independent of each other and servicing separate regions. In 1994, the power sector was opened up to private investors through the formation of PPIB, and a host of policy initiatives under the Power Sector Policies of 1994, 1998 and 2002, along with transmission and hydel policies liberalized the power sector to a great degree. The following table details the five year trend of installed generation capacity of Pakistan: Table 1.2: Installed Generation Capacity
(Capacity in MW)

Year ending June 30 Thermal Power GENCOs IPPs (connected with PEPCO system) IPPs (connected with KESC system) KESC Total Thermal Capacity Hydel Power WAPDA IPPs Total Hydel Capacity Nuclear Power CHASNUPP (connected with PEPCO system) KANUPP (connected with KESCL system) Total Nuclear Capacity Total Installed Capacity of the Country

FY2005 4835 5570 262 1756 12423 6464 35 6499 325 137 462 19384

FY2006 4900 5560 262 1756 12785 6444 35 6474 325 137 462 19450

FY2007 4900 5560 262 1756 12785 6444 35 6474 325 137 462 19420

FY2008 4900 5560 262 1756 12785 6444 36 6480 325 137 462 19420

FY2009 4900 5725 262 1955 12842 6444 37 6481 325 137 462 19786

Source: Pakistan Energy Yearbook 2009

13

With the growing energy demand, the country is currently facing a power shortage of approximately 2500 to 3000 MW, and some analysts predict the demand will exceed supply by 5000 MW during the summer peak of 2010. The present electricity demand-supply gap, coupled with a consistent growth in demand clearly indicates the fundamental need for enhancing the countrys power generation capability. The PPIB projects the demand-supply gap to be as follows: Figure 1.1: Demand and Supply Projections (MW)

45 40 35 '000 MW 30 25 20 15 10 5 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Expected Available Generation (MW) Demand (Summer Peak) (MW)

1.3.2 Regulatory and Institutional Framework The regulatory and institutional framework of the power sector in Pakistan can be summarized as shown in adjacent figure. The regulation of the electricity sector is governed by the NEPRA Act 1997 which replaced the provisions of the Electricity Act, 1910. NEPRA was constituted under this Act as an independent regulatory authority for regulating the provision of electric power services. It is exclusively empowered to regulate the generation, distribution and transmission of
Federal Government Provincial Governments and AJK

Ministry of Water & Power

Cabinet Division Regulatory guidelines

Policy and legislative framework

Tariff advisor NEPRA Licensing, Tariffs

PPIB

Tariff advisor

Provincial representation

Investment facilitation

Provincial Private Power Cells Investment review

WAPDA (and successors) Power Sector KESC IPPs

14

electrical power in Pakistan with respect to determining tariff rates, prescription and enforcement of performance standards and codes of conduct, issuance of licenses and other terms and conditions to encourage safe, efficient and reliable service.

1.4

The Project

GPL was incorporated on March 25, 2008, and received its certificate for commencement of business on May 13, 2008. The purpose of the Company is to build, own and operate a modern power generation plant, for onward sale and supply of electricity to NTDC. The Project is a brand new dual-fired Combined Cycle power generation plant, having a gross capacity (at ISO conditions) of 163.353 MW, and a dependable capacity at site of 146.5 MW. The primary fuel for the power plant is Residual Fuel Oil with High Speed Diesel as the back-up fuel. GPL was granted a generation license on July 8, 2009 for a period expiring on December 30, 2035. The site for the Project is an area of 30 acres located at Kamair at 15-km Arifwala-Sahiwal Road, in Tehsil and District Pakpattan. The allocated land was acquired and duly transferred to GPL on August 7, 2009. Load flow studies have been carried out to ascertain the technical viability of the location and its vicinity to a 132 kV grid station. The area has the necessary infrastructure in place and is easily accessible through a newly constructed metal road. Environmental Impact Assessment studies, topographical survey and considerable land development has been carried out in preparation of the civil works. The Company signed an EPC Agreement with CMEC as the Lead E&P Contractor and its subsidiary CERIECO, as the Construction Contractor in November 2008. A comprehensive EPC contract is expected to be finalized and signed by April 2010, and work on engineering, procurement and civil works is expected to commence immediately afterwards and be completed over a period of 26 months. NEPRA determined the final tariff for GPL on December 30, 2009 at US 12.4778 per kWh (levelized basis), applicable for a period of 25 years from COD, summarized as follows: Table 1.3: GPL Tariff Determined by NEPRA Tariff Components Total Capacity Charge (PKR/ kWh) Energy Charge based on RFO (PKR/ kWh) Fuel Cost Component (RFO) Variable O&M (Foreign) Levelized Tariff (at 60% Plant Factor) Year 1-10 3.0969 Year 11-25 1.0059

5.4625 5.4625 0.4691 0.4691 US 12.4778/ kWh

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The current shareholding structure of GPL is provided in the table below: Table 1.4 : GPL Shareholding Structure Shareholders/ Sponsors Grange Holdings Group Albario Engineering (Pvt.) Ltd Mr Assad Sheikh Mr. Shuja Hussain Mr. Amjad Faquir Total Shareholding 96% 1% 1% 1% 1% 100% No. of Shares 421,291,825 4,388,457 4,388,457 4,388,457 4,388,457 438,845,651

Grange Power Ltd has engaged and/or is in the process of finalizing contracts with the following advisors and contractors: Table 1.5: GPLs Advisors, Consultants and Contractors Company CMEC * Role E&P Contractor Status

Agreement signed. Contract expected to be signed in April 2010. CERIECO* (CMECs Construction Contractor Agreement signed. subsidiary) Contract expected be signed in April 2010. KPS O&M Contractor Terms agreed. Commercial negotiations at final stage. Scott Wilson Project/ Construction Negotiations at advanced stage. Manager Arif Habib Bank Co-Lead Arranger for Negotiations at advanced stage. onshore debt component Haidermota & Co Legal Counsel Negotiations in final stage AbacusConsulting Project Advisor Current KPMG Taseer Haid & Co Auditors Negotiations in final stage.
* CMEC and CERIECO have signed a tripartite agreement with GPL for providing turnkey EPC services. They are referred together as Contractors to GPL.

1.5

The Financials

Financial projections have been prepared based on the information provided by the Management of GPL and the NEPRA Tariff Determination of December 30, 2009. The costs, rates, indexation and other assumptions approved by NEPRA have been used to make the 25-year projections, the term duration allowed for GPL based on the expected life of the Project. A summary of key findings is as follows: The Project reflects an internal rate of return (IRR) of 16.24 percent, in real terms. This becomes more attractive in view of the assured 25-year tariff and sale of capacity and generation output. 16

Debt-to-Equity ratio is a maximum of 64% : 36% at the end of the first year of operations, tapering down to 0% : 100% in the 9th year - towards the end of the ten year repayment term. In terms of ability to meet financing obligations, the Debt Service Coverage Ratio (DSCR) remains at a constant of 1.34 over the debt servicing period. Earnings provide sufficient coverage for making interest payments, as demonstrated by the Times Interest Earned (TIE) which does not drop below 1.3 at any time throughout the 25 years, with an average of 2.02. During the first ten years, over the tenure of the loan, the average remains at 2.57. In terms of return on equity, the tariff is built to allow GPL a ROE of 15 percent. The various measures used in the financial model reflect these returns as: Dividend IRR of 14.88 percent, Equity IRR of 14.53 percent and an Actual ROE of 16.61 percent. The cumulative closing cash balances, after dividend payout and debt-servicing, remains a healthy positive throughout the 25-year period. The table below briefly highlights the financial results for GPL: Table 1.6: Financial Analysis- Project Base Case Financial Indicators Project Results (Base Case) IRR NPV at 15% (USD) NPV at 13% (USD) ROE (approx.) Payback (based on Cumulative Net Cashflow) Payback (based on Cumulative Discounted Net Cashflow) Debt Service Coverage during loan period Average Times Interest Earned Average Times Interest Earned (EBITDA) Average Net Margin Equity Results (as per NEPRA) IRR NPV at 15% (USD) NPV at 13% (USD) 16.24% 6,782,687 21,303,067 15% th 6 Year 12th Year 1.34 2.02 5.43 7.81%

15.07% 187,067 5,663,151

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2. TRANSACTION OVERVIEW
2.1 Introduction

Grange Power Limited has been formed with the objective of setting up a state-of-the-art power generation plant in Arifwala, Pakistan, with a gross ISO capacity of 163.35 MW. This independent power project (IPP) is being developed under the Governments Fast Track initiative which allows the Project to pass certain otherwise necessary procedural steps and achieve completion in a much shorter time period (see section 4.3.1 for details).

2.2

Project Status

As of February 2010, the following steps have been completed by the GPLs Management: Table 2.1 Milestones Achieved Milestones Expression of interest to PPIB for setting up an IPP under their recently introduced Fast Track policy initiative Registration with PPIB under the Fast Track initiative (PPIB Registration No. 1052) Public Limited Company Grange Power Ltd incorporated (Certificate of Incorporation No. 0064883) Firm of Chartered Accountants engaged as auditors for GPL: KPMG Taseer Hadi & Co. Application Proposal submitted to PPIB as per policy requirements Site approval and allocation by PEPCO and NTDC EPC Agreement signed on a turnkey basis with CMEC and CERIECO, a subsidiary of CMEC Petition to NEPRA for tariff determination Application to NEPRA for Generation License Load-flow studies completed by NTDC/PEPCO EIA Report submitted to Environmental Protection Department, Government of Punjab (awaiting NOC) Tariff determination by NEPRA Review petition to NEPRA for revised tariff Generation License granted by NEPRA Acquisition of land and transfer to GPL Topographical survey conducted by Berkley Associates O&M contract terms agreed with KPS Law firm engaged as legal counsel to oversee the implementation process, and agreements with government and third parties. Currently Haidermota & Co. 18 Dates December 12, 2007 February 25, 2008 March 25, 2008

In negotiation April 21, 2008 May 2008 November 7, 2008 December 15, 2008 December 16, 2008 February 2009 June 4, 2009 June 26, 2009 July 7, 2009 July 8, 2009 August 7, 2009 October 2009 November 2009 December 2009

Milestones Revised tariff determined by NEPRA Layout plan developed by CMEC In-Principle Agreement with Arif Habib Bank Ltd to arrange a syndicated loan, covering at least the onshore cost component Firm of Management Consultants engaged for financial and strategic advice. Currently AbacusConsulting Terms agreed with Scott Wilson, the proposed project and construction management firm.

Dates December 30, 2009 January 2010 February 2010 February 2010 In negotiation

2.3

Current Status

The PPIB, in its letter dated January 18, 2010, has requested the Management of GPL to make the necessary payments with respect to the Processing Fee and also submit the requisite Performance Guarantee at the rate of USD 5000 per MW. The Management is currently in the process of arranging such guarantee, subject to detailed discussions with their bankers.

2.4

Way Forward

The next key steps and milestones in the implementation process up to the Commercial Operations Date (COD) are envisaged as follows: Table 2.2 Milestones until COD Milestones Submission of Performance Guarantee (in process) EPC Contract signed with CMEC and CERIECO (agreement signed) LOS Issued by PPIB PPA signed with CPPA/NTDC FSA signed with PSO (in negotiation) IA signed with the Government of Pakistan Commencement of civil works Financial Close Trial Run Commercial Operations Date Expected Completion Dates April 2010 April 2010 April 2010 June 2010 June 2010 June 2010 June 2010 July 2010 August 2012 August 2012

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2.5

Capital Structure

The total project cost is estimated to be approximately USD 218.20 million, of which 25 percent or about USD 54.55 million is planned as equity and the remaining USD 163.35 shall be arranged as long term loan. The major shareholder in GPL is Grange Holdings Group (GHG) which currently holds 96 percent of the total number of shares outstanding. The remaining 4 percent are equally held by Albario Engineering (Pvt.) Ltd, Mr. Shuja Hussain, Mr. Assad Sheikh and Mr. Amjad Faquir. The EPC and equipment costs together constitute more than 75 percent of the total project cost, almost equivalent to the debt portion of total capital. Of this USD 164 million, USD 28 million is estimated as the onshore component and is planned to be arranged through local banks, whereas the offshore cost of USD 136 million shall be organized through foreign banks and financial institutions.

Fig 2.1. Capital Structure

25% Equity (USD 54M)

75% Debt (USD 164M)

GHG 96% (USD 52M)

83% Offshore EPC cost (USD 136M)

Others 4% (USD 2M) (Assad Sheikh, Shuja Hussain, Amjad Faquir, and AEPL) 17% Onshore EPC cost (USD 28M)

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2.6

Communication with the Company

All questions on this transaction should be directed to Mr. Shuja Hussain as key point of contact, at either of the following addresses: Mr. Assad Sheikh Chairman Grange Power Ltd. Unit 7, The Quadrant, Upper Culham Farm Cockpole Green Berkshire R610 8NR Tel: +44 (1) 1491 576544 Fax: +44 (1) 1491 576194 Mob: +44 (0) 7703123252 email: assad@inmind.co.uk Mr. Shuja Hussain Chief Executive Grange Power Ltd. 2nd Floor, 65-Z Commercial Area, DHA Lahore Lahore Cantt., Pakistan Tel: +92(0) 42 3702 9285 Fax: +92(0) 42 3589 2743 Mobile: +92(0) 300 8436999 email: grangepower@grangeholdings.com email: grangepower@gmail.com

21

3. INVESTMENT ENVIRONMENT IN PAKISTAN

3.1 Introduction

The Government of Pakistan is in the process of political, economic and institutional reform, with a view to strengthening the economy of the country, eliminating corruption from the government and improving the investment environment in Pakistan. The economy of the country has been affected by the tensions on the border and the security situation, however, the economic policies and reforms of the Government of Pakistan (GoP) and the support given to the international campaign against terrorism are expected to restore political and economic confidence in the country. Recent economic policies designed under the watchful eye of the International Monetary Fund (IMF) along with some monetary support extended by the Western powers in-lieu of the countrys role as a front line state in the global war against terrorism have started to bear some fruit. Investment in any country brings about growth and prosperity for the people of that country, and Pakistan bears no exception to this fact. GoP has also actively sought to encourage foreign direct investment in Pakistan to the extent that over 600 foreign companies have now established operations in Pakistan in addition to the flow of hot money witnessed in the Karachi Stock Exchange in recent years. It has adopted a policy of openness to foreign investment; it offers a range of incentives to attract foreign investors; and it has welcomed foreign interest in its wide-ranging privatization program, which, after a lull, is now resuming. China, UAE, Saudi Arabia, USA, UK and others remain amongst the leading countries responsible for inward FDI flow to Pakistan. Chinese investment in Pakistan according to analyst estimates tops USD 20 billion, and there are currently more than 120 projects initiated by China in Pakistan. Thereby China remains at the helm of the countrys foreign investment portfolio. The current democratically elected government has ensured continuation of the investment policies initiated by the previous government in order to attract and retain interest of investors both from home as well as outside Pakistan.

3.2

Political Situation

Pakistan operates under a parliamentary system of governance, with a bi-cameral legislature, including the National Assembly and the Senate. The National Assembly is composed of directly elected representatives of the people on adult franchise basis. The Senate is composed of members elected by the Provincial Assemblies (and in some cases the National Assembly) with equal representation of all the four Provinces of the federation. As a result of the elections held on February 18, 2008, a coalition government has been formed by the PPP which emerged as the largest party. The present Prime Minister, Mr. Yousuf Raza Gilani, was sworn in on March 25, 2008, after earning a unanimous vote of confidence from the parliament.

22

3.3

Legal System

The current legal system in Pakistan is a mixture of codified law based on English legal principles and common law, post-independence legislation (based on the common law system) and the relatively recent introduction of certain laws based on Islamic principles, referred to as the Shariah. Broadly, the Courts of Pakistan consist of city/ district courts, the Provincial High Courts, the Federal Shariah Court and the Supreme Court of Pakistan which is the highest court in Pakistan at the Federal level. Generally, an appeal from a decision of the High Court lies to a superior (Divisional Bench) of such High Court and then to the Supreme Court. Most issues affecting business do not fall under the jurisdiction of the Shariah Court. Generally, most commercial activities are regulated by codified law based on English legal principles and common law practice and by civil courts.

3.4

The Economy

Pakistan is the sixth most populous nation in the world, with approximately 164 million people as of 2009. The major sectors of Pakistans economy are agriculture (6%), industry (21%) and services (73%), with the services sector recording solid growth over the past few years. The following table illustrates key economic indicators for Pakistan over the last five years: Table 3.1: Pakistan Economic Indicators Economic Indicator Macroeconomics Real GDP Growth Agriculture Growth Manufacturing Growth Population (Million) Per Capita Income( USD) Financial Conditions External Debt Outstanding ( USD Billion) Debt Servicing as % of GDP Forex Reserves ( USD Billion) Budget Surplus/ (Deficit) (USD Billion) Inflation (CPI) Exchange Rate (PKR : USD) KSE-100 Index (as of yearend June 30) Trade Total Exports Current Price (USD Billion) Total Imports Current Price (USD Billion ) Export Growth % Import Growth %
*Note: Provisional Results Source: Economic Survey of Pakistan 2008-09

FY05 Actual 9.0% 6.5% 15.5 151 733 34.04 4.7 10.9 (5,649) 9.3% 59.8 7450.12 14.3 20.5 16.8% 32.1%

FY06 Actual 5.8% 6.3% 10.0 153 833 35.68 4.8 13.1 (4,556) 7.9% 59.8 9989.41 16.4 28.5 14.3% 38.7%

FY07 Actual 6.8% 4.1% 8.4 156 925 37.36 3.8 12.9 (6,212) 7.7% 60.6 13772.46 13.9 24.9 3.2% 6.8%

FY08 Actual 4.1% 1.1% 4.8 159 1,042 46.3 1.1 15.8 (11,173) 12% 62.5 12289.03 19.0 39.9 12.2% 30.8%

FY09* Provisional 2.4% 4.7% (3.3) 163 1,046 50.1 0.8 11.4 (8,547) 22.3% 78.0 7162.18 14.7 28.9 -3.03% -9.78%

23

The performance of economic growth of Pakistan remained outstanding from FY2002 to FY2007. Pakistan transformed into a stable economy through good macroeconomic policies along with structural reforms. Average real GDP growth during this period was the best of many decades. However following global and domestic shocks, the economy came temporarily off its rails in FY2009. The economic growth at 2 percent in FY2009 whilst stable has been severely undervalued since earlier estimates of around 4 percent. Nevertheless the positive growth figure is still reflective of the relative resilience of the economy to global phenomenon, including the slowdown in the world economy and rapid increases in the prices of petroleum products and other natural resources. Pakistans real GDP has been growing at an average rate of approximately 5.5 percent per annum over the last five fiscal years (FY2005 to FY2009). Pakistan, until recently, has been considered as one of the fastest growing economies of the region which includes heavyweights such as China, India, and Vietnam. This performance was a result of a combination of generally good economic policies and dynamic structural reforms. The last two years have been difficult for Pakistan and the economy has lost significant momentum. One of the prime contributors to this is the countrys proactive role in the war on terror. Pakistan, being a frontline state, has had to bear the brunt of the events that have unfolded after 9/11. Conservative estimates place the cost of this war at approximately USD35 billion since 2001 with this cost intensifying in the last fiscal year as the situation in Afghanistan deteriorated. However, GoP has initiated a host of macroeconomic policies and Pakistan is expected to weather the storm, improve the economic outlook and come out of this challenging phase in the near term. 3.4.1 Key Highlights of FY2009 Economic reform has, in recent years, become a priority for the GoP. The key achievements of FY2009, despite the regional and global challenges, include: A steady economic growth of 2 percent despite the pursuance of tight monetary policy resulting in interest rate increases, and the global financial turmoil Stellar overall agricultural growth at 4.7 percent. Major crops accounting for 33.4 percent of agricultural value-added registered an impressive growth of 7.7 percent. Livestock sector grew at 3.7 percent. Small and medium manufacturing sector maintained a healthy growth of 7.5 percent; The overall services sector maintained solid pace of expansion at 3.6 percent With strong average economic growth of 6 percent during the last six years, Pakistan continues to maintain its position as one of the fastest growing economies in the Asian region Per capita income in current dollar terms rose to USD 1,046 Real private consumption grew by 5.2 percent as against negative growth of 1.3 percent attained last year Trade balance improved by 15.9 percent as the trade deficit declined from USD16.8 billion to USD14.2 billion as compared to previous year figures; Despite monetary policy tightening, the credit to private sector continued with a net disbursement of PKR 26.8 billion 24

Weighted average lending rate has witnessed a decline from 15.5 percent in October 2008 to 14.3 percent in March 2009 The overall fiscal deficit is estimated to have been restricted to 4.3 percent A sharp decline in inflation from 25 percent in FY2008 to 17 percent A reduction in the current account deficit from as high as 8.5 percent of GDP to around 5.3 percent Build up of foreign exchange reserves beyond USD 14 billion Workers remittances totalled USD 6.4 billion in FY2009, depicting an increase of 19.5 percent over previous year 3.4.2 Exchange Rate Exchange rates between the Pakistan Rupee (PKR) and other major world currencies are under a free exchange rate system, with the US Dollar being used as an intervention currency to determine rates with other currencies. As of February 15, 2010, the interbank rate for USD 1.00 stood at PKR 84.97121 . 3.4.3 Credit Rating Standard and Poors outlook on Pakistans sovereign local and foreign currency ratings are as follows: Table 3.2: S&P Credit Ratings Country Sovereign local currency ratings (LT/Outlook/ST) B-/Stable/C Sovereign foreign currency ratings (LT/Outlook/ST) B-/Stable/C Sovereign foreign currency recovery rating 3
th

Transfer and convertibility assessment B2

Pakistan

Source: Standard & Poors (Sovereign Ratings and Country T&C Assessments as of 26 January 2010 .

3.5

Capital Markets

Pakistan has three active stock exchanges, namely the Karachi Stock Exchange, the Lahore Stock Exchange and Islamabad Stock Exchange. Karachi Stock Exchange (KSE) is the countrys largest and oldest exchange, established in 1947, with more than 85 percent of the total trading volume being routed through it. KSEs profile is summarized in the table below.

As per State Bank of Pakistan

25

Table 3.3: KSE Profile KSE Profile Number of Listed Companies New Companies Listed Fund Mobilized (PKR billion) Listed Capital (PKR billion) Turnover of Shares (billion) Average Daily Turnover of Shares (million) Aggregate Market Capitalization (PKR billion) FY05 659 15 54 438.5 88.3 351.9 2068.2 FY06 658 14 41.4 496 79.5 348.5 2801.2 FY07 658 16 49.7 631.1 54 262.5 4019.4 FY08 652 7 62.9 706.4 63.3 238.2 3777.7 FY09* 652 8 42.3 770.7 17.1 80.2 2057.1

*During FY2009, the stock market remained frozen for 110 consecutive days as a result of floor imposition on KSE100 Source: Economic Survey of Pakistan 2008/09

KSE remained one of the best performing stock exchanges in the global emerging markets, during the most part of this past decade. It continues to show resilience even in the aftermath of the global financial meltdown. This is due to the liberalized policies and reforms initiated by the previous government, which have been continued by the current government in order to strengthen the financial markets in Pakistan. The trend over the past one year up to January 2010 can be seen in the following graph: Figure 3.1: KSE-100 Index Movement - 2009
12000 10000 KSE-100 Index 8000 6000 4000 2000 0

At the end of February 16, 2010 session, the KSE-100 index gained 67.87 points to close at 9769.68 points. Trading volumes whilst on the lower side at 120.588 million shares, remain amongst the highest since the stock exchanges recovery, indicating growing confidence among investors. The overall market capitalization was up by PKR 23 billion as compared with the previous session and traded at PKR 2.812 Trillion. 26

Figure 3.2: KSE-100 Index Volume as of February 16, 2010

Source: Market Watch

3.6

Policy Incentives for Foreign Investors

Government of Pakistans industrial policy is designed to encourage foreign and local investment in the private sector. Full safeguards are provided to protect lawful investment. The governments role in the management of industry is to rapidly shift to a regulatory role in order to encourage private investment. Emphasis will be on expanding competition and creating new opportunities for the private sector by an encouraging government to phase out controls over prices and investment decisions, reduce subsidies and other special incentives which prevent competition from spurring efficiency and innovation. A key step in this regard has been the establishment of the Board of Investment (BOI), which is headed by the Prime Minister and constitutes of members from both the government and the private sector in order to boost foreign investor interest in the nations economy. Analysing the investment policies of the GoP it is found that foreign investment is permitted in all sectors of the economy without prior approval of the BOI except in those industries involving arms and ammunition, security, printing currency and mint, high explosives, and radioactive substances. State Bank of Pakistans (SBP) permission is no longer required for the issuance of shares in a service company. The foreign investment is however required to be registered with the SBP to facilitate the payment of dividend, if any. Multinational joint ventures are encouraged to improve foreign investment. Establishment of export-oriented industries is given preference. Pakistan's policy trends have been consistent with liberalization, deregulation, privatization and facilitation with incentives specifically designed to fulfil the needs of investors. Previously only the manufacturing sector was open to foreign investment. Now, the Policy Regime is more liberal with most other economic sectors open for foreign involvement and with significant efforts towards mobilizing domestic financial resources towards long term investment. Key features of Pakistans foreign investment policy instrument for most manufacturing, nonmanufacturing, infrastructure and social sectors are:

27

Liberal investment policy Equal treatment to local and foreign investors Sectors open for Foreign Direct Investment 100 percent foreign equity allowed in the manufacturing and non manufacturing sectors No Government sanction required Attractive incentives package Remittance of royalty, technical and franchise fee; capital, profits and dividends allowed Foreign investment fully protected under: Foreign Private Investment (Promotion & Protection) Act, 1976 Protection of Economic Reforms Act, 1992 Foreign Currency Accounts (Protection) Ordinance, 2001 Bilateral Agreements: Investment Protection to 48 countries Avoidance of Double Taxation to 51 Countries 3.6.1 Investment Incentive Package According to the BOI, the Government has provided an attractive incentive package for investors, as highlighted below: Table 3.4: Investment Incentive Package Policy Parameters Manufacturing Sector Non-Manufacturing Sectors Infrastructure Services incl. Agriculture IT and Telecom Social Services
Not required except specific licenses from concerned agencies Allowed Allowed Allowed 100% 0.3 0% 50% 100% 0.3 5% 50% 100% 0.15 0-5% 50%

Govt. Permission Remittance of capital, profits, dividends, etc. Upper Limit of foreign equity allowed Minimum Investment Amount (USD) Customs duty on import of PME Tax relief (IDA*, % of PME cost*) Royalty & Technical Fee

Not required except for specified industries Allowed 100% No 5% 50% No restriction for payment of royalty & technical fee

Allowed as per guidelines Initial lump sum up to USD100,000 Max Rate 5% of net sales Initial period 5 years

* PME: Plant Machinery and Equipment; Source: Board of Investment

IDA: Initial Depreciation Allowance

28

3.6.2 Exchange Control Repatriation of capital, capital gains, dividends and profits, is allowed. The facility for contracting foreign private loans (which does not involve any guarantee by the Government of Pakistan) is available to all those foreign investors, who make investment in sectors open to foreign investment, for financing the cost of imported plant and machinery required for setting up the project. However, loan agreements should be registered/ cleared by the State Bank of Pakistan. Foreign controlled manufacturing concerns are allowed unlimited domestic borrowing according to their requirements for working capital. For foreign controlled semi-manufacturing concerns, the borrowing entitlement is 75 percent of paid-up capital including reserves and for foreign controlled non-manufacturing concerns (trade/services) it is 50 percent.

3.7

Tax Regimes

The Federal Board of Revenue (FBR) is the tax administrative authority in Pakistan, which carries out taxation policies and administers all taxes (income tax, sales tax, central excise duty and customs duty). Pakistans tax system is irregular, with a narrow tax base covering a relatively small section of income earners. 3.7.1 Tax Rates Corporate Income Tax: According to the Income Tax Ordinance 2001 (updated October 2009), the rate of tax imposed on the taxable income of a company shall be 35 percent. Personal Income Tax: Personal income tax rates applicable for FY2010 are given in the following table:

29

Table 3.5: Personal Income Tax: Income Range Where taxable income does not exceed PKR 100,000 Where the taxable income exceeds PKR 100,000 but does not exceed PKR 110,000 Where the taxable income exceeds PKR 110,000 but does not exceed PKR 125,000 Where the taxable income exceeds PKR 125,000 but does not exceed PKR 150,000 Where the taxable income exceeds PKR 150,000 but does not exceed PKR 175,000 Where the taxable income exceeds PKR 175,000 but does not exceed PKR 200,000 Where the taxable income exceeds PKR 200,000 but does not exceed PKR 300,000 Where the taxable income exceeds PKR 300,000 but does not exceed PKR 400,000 Where the taxable income exceeds PKR 400,000 but does not exceed PKR 500,000 Where the taxable income exceeds PKR 500,000 but does not exceed PKR 600,000 Where the taxable income exceeds PKR 600,000 but does not exceed PKR 800,000 Where the taxable income exceeds PKR 800,000 but does not exceed PKR 1,000,000 Where the taxable income exceeds PKR 1,000,000 but does not exceed PKR 1,300,000 Where the taxable income exceeds PKR 1,300,000 Tax Rate* 0% 0.50% 1.00% 2.00% 3.00% 4.00% 5.00% 7.50% 10.00% 12.50% 15.00% 17.50% 21.00% 25.00%

* Provided that the salary is less than 50% of total annual taxable income A second bracket for individuals with salaries constituting more than 50% has also been added as an update to the Income Tax Act 2001. Source: Federal Board of Revenue

3.7.2 Withholding Tax The following withholding tax rates are prescribed for every resident assessee: Table 3.6: Withholding Tax Description Execution of contract Payment on account of supplies
Source: Federal Board of Revenue

Tax Rate 6.0% of gross amount payable 3.5% of gross amount payable

3.7.3 Inter-Corporate Dividend Tax In general, dividends paid by a company resident in Pakistan are taxed at 10 percent of the gross amount of the dividend. Furthermore, the tax rate on dividends paid by the purchaser of a power project privatised by WAPDA is reduced to 7.5 percent. Also the taxation rate shall be reduced to 7.5 percent in case of dividends declared or distributed, on shares of a company set-up for power generation. 3.7.4 Unilateral Relief A person resident in Pakistan is entitled to tax relief on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower.

30

3.7.5 Tax Treaties The Government has an agreement with fifty-seven countries to avoid double taxation and also lays down basic principles of taxation, which cannot be modified unilaterally. These countries include among others, China, France, Korea, UAE, UK and USA. 3.7.6 Capital Gains Tax The current exemptions from capital gains tax (CGT) are on any dealings in shares, investment in redeemable capital listed on a registered stock exchange in Pakistan and Pakistan Telecommunication Corporation Vouchers issued by the Government of Pakistan. These exemptions have been extended further up to June, 2010. Gain on sale of shares of companies located in the export processing zones is exempt from CGT unconditionally.

31

4. PAKISTAN ENERGY SECTOR

4.1 Energy Sector Overview

The Government of Pakistan has identified the energy sector in Pakistan as playing a pivotal role in the development and growth of the Pakistan economy. GoP has stated the main objectives of its policy for the Pakistan energy sector as ensuring: Adequate, secure and cost effective supplies Efficient utilization of resources Minimization of negative environmental impacts The key primary sources of energy in Pakistan are oil, gas and hydroelectricity. Petroleum products and natural gas account for almost 80 percent of commercial energy, hydroelectricity for about 11 percent and the rest is made up by coal, liquefied petroleum gas (LPG) and nuclear energy. Major energy sources are discussed in more detail in later sections. The Governments actions have focused on promoting private investments in all the sub-sectors of the energy sector, establishing regulatory agencies, and facilitating gradual movement towards competition and free market mechanism. The GoP asserts its long term goal as creating a competitive, efficiently run, financially viable, and largely privatised energy sector maximizing service outreach to the population. 4.1.1 Oil About 30 percent of commercial energy consumption in Pakistan comes from oil. Pakistan produces 60,000 to 70,000 barrels per day (bbl/d) of crude oil annually. However, Pakistans annual consumption of petroleum products (petroleum energy and non energy products combined) is in excess of 370,000 bbl/d requiring net annual oil imports of over 300,000 bbl/d. GoP has encouraged the development of domestic production and refining capacity by the private sector. According to records, 11 companies are currently active in oil and gas exploration and production in Pakistan including global giants such as BP (British Petroleum) and Malaysias Petronas. This number is expected to increase as more and more local and foreign companies are showing interest in the sector. Pakistan's net oil imports are projected to rise substantially also in the coming years as demand growth exceeds increases in production. Demand for refined petroleum products also significantly exceeds domestic refining capacity, so nearly half of all imports are refined products. A summary of crude oil production in Pakistan is set out in the following graph:

32

Figure 4.1: Crude Oil Production (bbl/d)

80 70 60 '000 bbl/d 50 40 30 20 10 FY04 FY05 FY06 Years FY07 FY08 FY09 PPL Dewan Petroleum BP Petronas OMV OPII OGDC MOL ENI POL BHP

Source: Pakistan Energy Yearbook 2009

Pakistan has a total refining capacity of 12.95 million tonnes per year. Nearly 82 percent of this capacity is utilized to meet the consumption while the rest of the processed crude oil is imported. This refining process results in a total of about 10.7 million tonnes of various petroleum products - meeting around 60 percent of the local consumption. There are seven oil refineries in the country with the latest addition being Bosicor Refinery which commenced production in FY 2004. Other major ones include Pak Arab Refinery Corporation (PARCO), National Refinery Ltd (NRL), Pakistan Refinery Limited (PRL) and Attock Refinery Limited (ARL). The refineries produce a full range of products, however only 30 percent of their energy products production is furnace oil (also referred to as fuel oil or residual fuel oil) which means that to satisfy national demand nearly 55.5 percent has to be imported. Residual Furnace Oil (RFO) and High Speed Diesel (HSD) are amongst the most dominant sources of energy production in the country, and account for an average of 36 percent and 49 percent respectively of the aggregate petroleum energy products consumed in the country3. The demand for RFO has seen average growth of around 17 percent over the five years spanning FY2004 to FY2009. Much of the demand has come from the power sector, which is the primary user of the RFO fuel. With the supply of natural gas becoming increasingly unreliable, and the ever increasing prices of the HSD (the primary alternative), focus has been on installing RFO based plants in order to ensure a smoother flow of electric power to the national grid. The graph below shows the consumption trends over recent years for RFO and HSD against total national consumption of petroleum products.

Pakistan Energy Yearbook 2008 and OCAC 2010.

33

Figure 4.2: Consumption of Furnace Oil and HSD (Million Tonnes)

22.5 20.0 17.5 Million Tonnes 15.0 12.5 10.0 7.5 5.0 2.5 FY03 FY04 HSD FY05 FY06 Furnace Oil FY07 Total FY08 FY09

Source: Pakistan Energy Yearbook 2008, OCAC Province Wise Fuel Consumption 2009

Until 1999, the government tightly controlled the oil and gas industries of Pakistan. Since then, however, an ambitious pro-market reform program has been initiated. This includes setting up of the Regulatory body (Oil and Gas Regulatory Authority or OGRA), deregulation of furnace oil price and a move towards transparency and proposed sector reforms including privatization in order to promote competition. Furnace oil prices have been completely deregulated since July 2000, while the HSD market was partially deregulated in 2002. Altogether, these two products constitute about 86 percent of the petroleum products market). Prices are adjusted every fortnight in accordance with changes in international market prices. The fortnightly petroleum products price revision is carried out by the Oil Companies Advisory Committee (OCAC), in accordance with a government approved framework. OCAC is an industry group with membership of five refineries, ten oil marketing companies and one pipeline distribution company. Sale price information for furnace oil for the period spanning from July 2007 to June 2009 is provided below. The current price with effect from February 1st 2010 stands at 41,634 Rupees/Tonne4.

Sourced from: Pakistan Refinery Limited at http://www.prl.com.pk/products/

34

Figure 4.3: Deregulated Furnace Oil Sale Price (PKR/Tonne)

70000 60000 Rupees/Tonne 50000 40000 30000 20000 10000 0 May-08 May-09

Aug-08

Aug-07

Apr-08

Sep-07

Nov-07

Feb-08

Sep-08

Nov-08

Dec-07

Mar-08

Dec-08

Feb-09

Mar-09

Apr-09

Jul-07

Oct-07

Jan-08

Jun-08

Jul-08

Oct-08

Jan-09

Total Price Source: Pakistan Energy Yearbook 2009

Pakistan has ten5 oil marketing companies (OMCs), with two largest being Pakistan State Oil and Shell Pakistan, holding approximately 85 percent of the white oil market share. The others constitute primarily of Admore Gas (Pvt.) Ltd, Askar Oil Services (Pvt.) Ltd, Attock Petroleum Ltd, Chevron Pakistan Ltd and Total Parco Pakistan Ltd.

4.1.2 Gas Natural gas meets about 50 percent of the countrys current demand for commercial energy, which at present rate of sectoral penetration, is likely to exceed in the next five years. Pakistan has 28.90 trillion cubic feet (Tcf) of proven gas reserves, and currently produces around one Tcf of natural gas per year, all of which is consumed domestically. Natural gas producers include Pakistani companies Pakistan Petroleum Limited (PPL), Oil and Gas Development Company Ltd (OGDC), Mari Gas Company Limited (MGCL) and Dewan Petroleum among others, as well as international companies such as Petronas, Tullow, ENI,, British Petroleum and BHP Billiton. The largest currently productive fields are Sui with largest original recoverable reserves of 12.62 Tcf, whereas Mari and Kandanwari (with a combined 8.68 Tcf) are also among the countrys major natural gas fields.

A summary of natural gas production in Pakistan is set out in the graph below:

Sourced from: http://www.ocac.org.pk/members.html

35

Jun-09

Figure 4.4: Natural Gas Production (MMCF)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 FY05 FY06 FY07 Years FY08 FY09 BP Tullow PPL POL Petronas PEL OPII OMV OGDC MOL MGCL ENI Dewan Petroleum BHP

Source: Pakistan Energy Yearbook 2009

Distribution and retail supply services are provided by the predominately government owned businesses of Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL). The two companies own 3200 km and 7347 km of transmission system, respectively and there is one major interconnected network providing gas, owned and operated by the two Suis. Both organisations transport gas to and distribute gas within, separate geographic regions and hence there is no competition between the two Suis. In addition, the Mari Gas Company also provides a limited system. Given the huge pressure on demand for natural gas, estimates indicate demand to rise substantially in the next few years. An estimated 53 percent demand growth is expected to be recorded over the period spanning from 2009-2019, which would require imports from regional natural gas giants such as Central Asian States, Iran and Gulf states. We understand that SNGPL and SSGC have refused to commit gas supplies beyond five years in view of the non-availability of gas. In order to preempt a potential crisis the government has decided to temporarily suspend accepting raw-site proposals for power plants based on pipeline quality gas. The Private Power Infrastructure Board has so far received about 24 unsolicited proposals for gas-based power plants with a total capacity of 3,548 MW and it is expected that only a small proportion of these July be eligible for serious government consideration. 4.1.3 Coal Coal currently plays a minor role (7.6 percent) in Pakistan's energy mix, but with compounded growth of about 15 percent per annum, it is expected to gain significance in the sector, quite rapidly. Estimated reserves of coal in Pakistan are around 187 billion tonnes, with 175 billion tonnes of these reserves being low-ash, low-sulphur lignite in Thar Desert of the Sindh province. The majority of coal production is used in the manufacture of coal bricks, with only about 1 percent used for power production. 36

Million CFt

4.2

Power Sector

Historically, the power sector in Pakistan has consisted of two major state-owned utilities: Water & Power Development Authority (WAPDA) powering the entire country except for the metropolitan city of Karachi and adjacent southern areas, which are powered by Karachi Electric Supply Corporation (KESC). These two utilities have operated independently of each other, except for a 220 kV double circuit and two 132 kV links. Following the power crisis of the 1980s and 1990s, the GoP announced certain measures to encourage private sector participation in the power sector in anticipation of a demand supply gap. A host of policy initiatives under the Power Sector Policies of 1994, 1998 and 2002, along with transmission and hydel policies, liberalized the power sector to a great degree. In 1994, the power sector was opened up to private investors through the formation of Private Power and Infrastructure Board (PPIB). So far PPIB has been able to successfully commission more than 15 power plants responsible for generating 5,987 MW of electricity. These policy initiatives also allowed foreign investors greater market access and autonomy in operations, resulting in the power sector becoming a front runner for securing FDI for Pakistan. 4.2.1 Installed Generation Capacity Pakistan has over 19,786 MW of installed generation capacity as of end FY2009. Thermal plants comprise about 64 percent of this capacity, with the rest made up of hydroelectricity (about 32%) and nuclear power (about 2%). In terms of ownership, 11,344 MW (56%) is owned by WAPDA: 1,955 MW (9%) by KESC; 6,024 MW (30%) by IPPs and 462 MW (2%) by the Pakistan Atomic Energy Commission (PAEC). Approximately 95 percent of the grid system is operated by WAPDA through NTDC, and the balance by KESC. Largely due to foreign investments, Pakistan's total generation capacity has increased rapidly in recent years (more than doubling since 1990). Total transmission and distribution system losses, however, continue to be high also (around 25 percent according to some estimates), with a significant level of power theft. Seasonal reductions affect the availability of Pakistans hydropower capacity. With much of the countrys rural area lacking electrification, and less than half of the population connected to the national grid, a significant power demand growth is expected in the long term. The growth of power generation in recent years has come primarily from new independent power producers, many of which have been funded by foreign investors, as well as from a few WAPDA hydroelectric dam projects. Reform of the power sector through restructuring and deregulation is high on the Governments agenda. The Government is committed to the pursuit of a far-reaching reform program to help meet the country's future power needs. An analysis of installed generation capacity is summarized in the following table: 37

Table 4.1: Installed Generation Capacity in Pakistan (Capacity in MW)

Year ending June 30 Thermal Power GENCOs IPPs (connected with PEPCO system) IPPs (connected with KESC system) KESC Total Thermal Capacity Hydel Power WAPDA IPPs Total Hydel Capacity Nuclear Power CHASNUPP (connected with PEPCO system) KANUPP (connected with KESCL system) Total Nuclear Capacity Total Installed Capacity of the Country
Source: Pakistan Energy Yearbook 2009

FY2005 FY2006 FY2007 FY2008 FY2009 4,835 5,570 262 1,756 12,423 6,464 35 6,499 325 137 462 19,384 4,900 5,560 262 1,756 12,785 6,444 35 6,474 325 137 462 19,450 4,900 5,560 262 1,756 12,785 6,444 35 6,474 325 137 462 19,420 4,900 5,560 262 1,756 12,785 6,444 36 6,480 325 137 462 19,420 4,900 5,725 262 1,955 12,842 6,444 37 6,481 325 137 462 19,786

4.2.2 Structure of Power Sector Following the governments pro-privatization stance initiated in the Power Sector Policies, WAPDA has been restructured into four thermal generation companies, nine regional distribution companies, and a national transmission and dispatch company. Pakistan Electric Power Company (Pvt.) Ltd (PEPCO) has been created as a distinct entity within WAPDA as a holding/ managing company for the fourteen new unbundled companies. As per policy, the Water Wing and therefore the hydroelectric capacity remains unbundled and with WAPDA. The following table illustrates the unbundling of WAPDA into specialized entities:

38

Table 4.2:

Unbundled Entities of WAPDA

Unbundled Power Entities Unbundled WAPDA generation companies (GENCOs): 1. 2. 3. 4. Southern/ Jamshoro Power Generation Company (GENCO-1) Central Power Generation Company Ltd. (GENCO-2) Northern Power Generation Company Ltd. (GENCO-3) Lakhra Power Generation Company Ltd. (GENCO-4)

Power Sub-Sectors Generation

Distribution

Unbundled WAPDA distribution companies (DISCOs): 1. 2. 3. 4. 5. 6. 7. 8. 9. Lahore Electric Supply Company (LESCO) Gujranwala Electric Power Company (GEPCO) Faisalabad Electric Supply Company (FESCO) Islamabad Electric Supply Company (IESCO) Multan Electric Power Company (MEPCO) Peshawar Electric Supply Company (PESCO) Hyderabad Electric Supply Company (HESCO) Quetta Electric Supply Company (QESCO) Tribal Electric Supply Company (TESCO)

Transmission

1. National Transmission and Despatch Company Ltd (NTDC)

4.2.3 National Transmission and Despatch Company Incorporated in November 1998, the National Transmission and Despatch Company (NTDC) was licensed in 2002 to engage in the exclusive transmission of electricity to the national grid for a period of 30 years. The NTDC links the power generating units and load centers across the entire country, as shown in the adjacent figure. NTDC is responsible for the transmission and interconnection facilities and for the economic dispatch of all generation facilities connected either directly or indirectly. NTDC system consists of a large network of transmission lines and grid stations of voltage capacities from 220 kV to 500 kV. The NTDC operates and maintains nine 500 kV grid station, 4,160 km of 500 kV transmission line and 4,000 km of 220 kV transmission line in Pakistan. This national grid connects hydel stations located in the North and thermal units installed mostly in 39

the Central and Southern region with the load centers. Under NTDC, dispatch functions and coordination of supply and operation of the system are undertaken by the National Power Control Center (NPCC). NTDC has been given the task of market and system Operator. On December 31, 2002, NTDC was granted the transmission license by NEPRA whereby NTDC became the sole buyer of bulk power being produced in Pakistan for a period of 30 years for onward transmission/sale to the distribution companies. Under the regime set out in the license, the NTDC is entrusted to act as:Central Power Purchasing Agency, to procure electric power in bulk from GENCOs, IPPs and other power stations on behalf of DISCOs System Operator, to provide a secure, safe and reliable operation of distribution facilities, and control and dispatch of generation facilities Transmission Network Operator, to conduct operation and maintenance, planning, design and expansion of the 500kV and 220kV transmission network Contract Registrar and Power Exchange Administrator, to record and monitor contracts relating to the bilateral trading system

As per policy governing IPPs, CPPA/NTDC shall be GPLs sole purchaser of power generated by the plant. Figure 4.5: Structure of CPPA as Part of NTDC Board of Directors

Consultant

Finance Dir.

CPPA Board

TNO/ TECH Dir Internal Audit

Other Admin. HODs

GM Services Div.

GM (Sys. Op.) NPCC

CE Coord. & Monitoring.

Operational Officer GM P Purchase (WPPO) Dy. GM Finance GM Power Sale

Source: NTDC

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4.3

Independent Power Producers

The burgeoning electricity demand coupled with generation capacity issues has resulted in the need for greater private sector involvement in the countrys power sector. Around 30 percent of the cumulative power generation of the country equating to 5,987 MW is sourced from the IPPs. Successive governments have highlighted the importance of IPPs in the nations economy and through various policy initiatives tried to attract private and foreign investors into power generation. Resultantly there are more than 15 active IPPs currently operating in the previously largely public sector dominated power sector. These include: Table 4.3: Installed IPPs Project Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 AES Lalpir Limited AES Pak Gen (Pvt.) Limited Attock Gen KAPCO Fauji Kabirwala Power Company Gul Ahmed Energy Ltd. (GAEL) Habibullah Coastal Power (Pvt) Limited Japan Power Generation (Pvt) Limited Kohinoor Energy Limited Rousch (Pakistan) Power Limited Saba Power Company Limited Southern Electric Power Company Limited Tapal Energy Limited TNB Liberty Power Uch Power Limited HUBCO Total Gross Capacity (MW) 362 365 165 1,466 157 136.17 129 136 131.44 450 134 117 126 235 586 1,292 5,987

Source: Pakistan Energy Yearbook 2009

Furthermore, there are about 37 IPPs in the pipeline according to the PPIB, expected to come on line by December 2017 with an additional capacity of 10,242MW. These include a host of thermal IPPs as well hydel and alternate energy IPPs (see table on next page).

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Table 4.4: IPPs in the pipeline Project 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 AttockGen Power Atlas Power Nishat Power Saif Power Orient Power Fauji Mari Power Engro Power Sapphire Power Nishat Chunian HUBCO-Narowal Bhikki (Halmore) Power Liberty Power Tech Grange Power Limited Radian Power Engro ICB Power Star Thermal Power Uch II Power Green Power Kandra Power New Bong Escape Hydel Rajdhani Hydro Power Gulpur Hydro Power Patrind Hydropower Kotli Hydel Sehra Hydel AES Imported Coal Karot Hydel Madian Hydropower Asrit-Kedam Hydel Azad Pattan Hydel Kalam-Asrit Hydel Shogosin Hyderopower Shushgai Zhendoli Hydel Gabral-Kalam Hydropower Suki Kinari Hydropower Kohala Hydropower Kaigah Hydel Total
* NYC-Not Yet Commissioned Source: PPIB

Location Morgah, Rawalpindi Sheikhupura Lahore Sahiwal Balloki Daharki Qadirpur Muridke Lahore Narowal Bhikki Faisalabad Arifwala Pasrur Near Bhikki Daharki Dera Murad Jamali, Dadu Kandra near Sukkur Jehlum River, Near Mangla Poonch River, Near Mangla Poonch, River/Gulpur Kunhar River Poonch River Poonch River Gadani, Karachi Jehlum River Swat River NearKalam/SwatRiver Jehlum River/Sudhnoti Swat River Luthko River/Chitral Turkho River/Chitral Gabral/Swat River Kunhar River/ Mansehra Jehlum River/Kohala Kaigah/Indus River

Capacity (MW) 156 213.6 195.26 209 212.7 176.66 216.8 209 195.26 213.6 209 195 146.5 150 527 125.84 375.2 170.95 120 84 132 100 150 100 130 1200 720 157 215 222 197 127 102 101 840 1100 548 10,242.37

Expected COD COD (Mar 2009) COD (Aug2009) COD (November 2009 Jan 2010 (NYC)* Jan 2010 (NYC)* Jan 2010 (NYC)* Jan 2010 (NYC)* Feb 2010 (NYC)* Mar 2010 Mar 2010 Decr 2010 Dec 2010 Dec 2011 Jun 2012 Dec2012 Dec 2012 Dec 2012 Dec2012 Dec 2013 Dec 2013 Dec 2014 Dec 2014 Dec 2014 Dec 2014 Dec 2014 Jun 2015 Aug 2015 Dec 2015 Dec2015 Aug 2016 Dec 2016 Dec 2016 Dec 2016 Dec 2016 Jun 2017 Dec 2017 Dec 2017

42

4.3.1 IPP Fast Track Initiative: The Fast Track initiative is a policy introduced by PPIB in 2007, in view of the urgent need for generation capacity to be installed. Under this initiative, a generation capacity of 2,225 MW is to be developed on a fast track basis through new private sector power generation projects, on a first-come-first-serve principle. These IPPs shall be facilitated and processed at speed by PPIB with no requirement for the sponsors to obtain a Letter of Interest (LOI) or carry out the feasibility study for the proposed project. These IPPs were initially to be completed with a COD no later than December 2010, however this deadline has now been revised to 2012. To be able to register under the Fast Track policy and benefit from the initiative, a potential IPP is required to observe the following guidelines: Register under the Fast Track initiative, by depositing USD 100 with the PPIB Submit an application containing the following details: Proposed plant capacity with endorsement of power purchaser Exact site finalization of the plan after endorsement of the power purchaser Unconditional acceptance of Upfront Tariff devised by NEPRA for reciprocating engines available at NEPRA website, in case of not applying for a fresh tariff determination by NEPRA Contact details of the contact/ focal person (address, telephone, fax, email etc) Confirmation of availability of equipment from the proposed supplier Consortium details (main sponsors and equity percentage of each member) Audited Financial Statements of the sponsor(s) for the previous three (3) years Experience of successfully commissioned power projects (either by the sponsors or by any of the Consortium members) with no less than 50 percent of the proposed projects capacity Technical and Financial Evaluation and approval by PPIB PPIBs advice to the Sponsors to approach NEPRA for tariff determination and issuance of Generation License Submission of Application by the Sponsors to NEPRA for tariff determination and General License NEPRAs tariff determination and issuance of Generation License PPIBs letter to Sponsors for submitting Performance Guarantee at USD 5,000 per MW, and processing fee of USD 100,000 Submission of Performance Guarantee and processing fee by the Sponsors to PPIB Issuance of Letter of Support by PPIB Signing of PPA, FSA and IA Financial Close by the Sponsors within nine (9) months after issuance of LOS

4.4

RPPs

The Rental Power Producer (RPP) initiative has also been recently launched by the PPIB for the implementation of 1,200 MW of additional power generating capacity on a high speed basis. The intent of this initiative has been to address the immediate shortfall of electric energy in the national grid, which has threatened economic growth of the country. RPPs by design require around four (4) to six (6) months of setting-up time as compared to an average of four (4) to five (5) years for IPPs, as the entire plant (already commissioned elsewhere) is sourced directly and its power plugged onto the grid. Under 43

the RPP policy instrument, government owned power generation companies or GENCOs buy the power generated by the RPPs, who are signatories of the Rental Services Agreement on behalf of the government. As of 2009 there exist 19 such projects, at various stages of completion, with a combined capacity of 2,734 MW. Of these, eight (8) projects with an aggregate capacity of 1,156 MW are in a more advanced stage of contractual commitment by the Buyer. In view of the incentives provided by GoP to RPP sponsors, they have become controversial and their fast track objective has been lost considerably.

4.5

Power Sector Demand vs Supply Dynamics

The exponential growth in demand for electricity due to rapid electrification of rural, urban and industrial sectors, coupled with improving standards of living has pushed the surplus in 2004 to a major deficit today. Over the past five years, using electricity generation as surrogate for supply, we can estimate increase in supply at a compounded annual growth rate (CAGR) of 1.7 percent, as can be seen in the graph below. Figure 4.6: Gross Generation of Electricity by Source (GWh)
120 100 80 60 40 20 FY05 FY06 FY07 WAPDA KESC FY08 IPPs FY09 Nuclear Hydel (WAPDA) Source: Pakistan Energy Yearbook 2009

Similarly, taking electricity consumption as surrogate for Demand, we can see it growing at a CAGR of 3.5 percent over the same five year period.(see figure below) Figure 4.7: Electricity Consumption by Province (GWh)
80 '000 GWh 60 40 20 0 FY05 Punjab FY06 Sindh FY07 NWFP FY08 Balochistan AJK FY09

'000 GWh

44

Electricity balances for the past five years area provided below: Figure 4.8: Electricity Balances (Public Utilities only) (GWh)
120 100 '000 GWh 80 60 40 20 FY2005 FY2006 FY2007 Net Supply FY2008 Consumption FY2009 T&D Losses Total Generation

Note: The difference between Total Generation and Net Supply is auxiliary consumption Source: Pakistan Energy Yearbook 2009

Adequate power supply is the key to achieving sustainable economic growth. Presently, the government is committed to providing power to the entire population in the least amount of time possible. With the growing energy demand, the country is currently facing a power shortage of approximately 2,500 to 3,000 MW. The present electricity demand-supply gap, coupled with a consistent growth in demand clearly indicates the fundamental need for enhancing the countrys power generation capability. The PPIB predicts that the peak demand shall outstrip expected available capacity by around 33 percent towards the end of the projected period. Figure 4.9: Demand and Supply Projections (MW)
50 40 '000 MW 30 20 10 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Expected Available Generation (MW) Source: PPIB Demand (Summer Peak) (MW)

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4.5.1 Demand Patterns Seasonality and Time-of-Day The electric load varies in Pakistan during summer and winter seasons (as may also be seen in the graph above). During the summer, inductive load increases due to air conditioning and other motor operated appliances such as fans, while in the winter, the resistive load increases due to electric heaters. The peak load hours in Pakistan are generally between 4pm and 9pm. This load decreases to its minimum between midnight and 5am. Load shedding has been a consistent feature of the demand supply scenario. This is expected to continue to be a control mechanism as generation continues to lag behind demand. 4.5.2 Sector Demand Domestic sector is the most significant in terms of electricity consumption with a 45 percent share, followed by industrial (27%) and agriculture (12%). The consumption composition has only slightly changed over the past five years, with domestic sectors share increasing at the expense of agriculture.

Figure 4.10: Electricity Consumption by Sector and Region

Street Light 1% Bulk Supplies 6% Domestic 46%

Agriculture 13%

NWFP Balochistan AJK 1% 6% 11% Sindh 20% Punjab 62%

Industrial 27%

Commercial 7%

Source: Energy Yearbook 2009

4.5.3 Regional Demand In terms of regional share, the province of Punjab is by far the largest consumer of electric power with about 60 percent, followed by Sindh at 20 percent and the rest shared among NWFP, Balochistan and Azad Jammu and Kashmir (AJK). In FY2008, 45,040 GWh of power were consumed by Punjab accounting for about 61 percent of the total consumption of electricity distributed through WAPDA.

46

5 POWER SECTOR REGULATION

5.1 Regulatory Framework

The regulation of the electricity sector is governed by the NEPRA Act 1997 which replaced the provisions of the Electricity Act, 1910 relating to regulation of the electricity sector. National Electric Power Regulatory Authority (NEPRA) was constituted under the NEPRA Act as an independent regulatory authority for regulating the provision of electric power services. It is exclusively empowered to regulate the generation, distribution and transmission of electrical power in Pakistan and to determine the tariff, rates, charges and other terms and conditions for provision of electrical power services. The NEPRA Act and related Rules provide for the issuance of separate generation, transmission and distribution licenses and set out procedures for the establishment of tariffs. However, as an exception, NEPRA is specifically empowered to grant licenses for the generation, distribution and transmission of electrical power to the same licensee for the territory served by KESC at the time of enactment of the NEPRA Act. NEPRA is currently in the process of defining and implementing a framework for regulation and a plan for transition to greater market liberalisation of the sector.

5.2

Provincial Representation at NEPRA

NEPRA consists of a Chairman and four members who are appointed by GoP. The members are recommended by and represent the four provinces of Pakistan. The Authority is supported by both professional and administrative staff. The provincial representation, inter alia, addresses the rights granted under the Constitution for the Governments of the four Provinces to determine the tariffs for distribution of electricity within that Province, a right which has not otherwise been exercised. Further to this, the Supreme Court has held that provincial governments can only set distribution tariffs, if they purchase power in bulk or construct power houses or grid stations or lay down transmission lines for use within the province.

5.3

Institutional Framework

The following diagram summarizes the interrelationship between the power sector, GoP, NEPRA and other entities involved in establishing and executing power sector policy in Pakistan. 47

Figure 5.1:

Power Sector Institutional Framework Federal Government

Provincial Governments and AJK

Ministry of Water & Power

Cabinet Division Regulatory guidelines Tariff Advisor Provincial representatio n Provincial Private Power Cells Licensing, Tariffs

Policy and legislative framework

PPIB

Tariff advisory

NEPRA

Investment facilitation WAPDA (and successors)

Power Sector

KESC IPPs

Investment review

5.4

NEPRAs Role and Responsibilities

NEPRA has exclusive responsibility for regulating the provision of electric power services in Pakistan. It is required to prescribe performance standards for generation, transmission and distribution companies in order to encourage safe, efficient and reliable service. NEPRAs has a number of roles including: Granting licenses for the generation, transmission and distribution of electric power; Determination of tariffs, rates, charges and other terms and conditions for the supply of electric power services by generation, transmission and distribution companies; Encouraging uniform industry standards and codes of conduct for generation, transmission and distribution companies; Prescription of procedures and standards for investment programmes by generation, transmission and distribution companies; Prescription and enforcement of performance standards for generation, transmission and distribution companies; Review of the organisational affairs of generation, transmission and distribution companies to avoid any adverse effect on the operation of electric power services and for the continuous and efficient supply of these services; 48

Establishment of a uniform system of accounts for generation, transmission and distribution companies; Prescription of fees including those for the granting and renewal of licenses; Prescription of fines for contravention of the NEPRA Act; Submission of reports to GoP in respect of the activities of the generation, transmission and distribution companies; Provision of advice to public sector projects; and Performance of any other function which is incidental or consequential to any of the aforementioned functions.

5.5

Licenses

Under the NEPRA Act, NEPRA is responsible for the granting of generation, distribution and transmission licenses. The term of a generation license is determined by reference to the expected useful life of the Sets comprising the plant in question. In the event of a licensees consistent failure to comply with license conditions of its license, NEPRA may, with due notice, suspend or revoke the license. Rule 8 of the NEPRA Licensing (Generation) Rules 2000, specifies events which can lead to the revocation of a license. Where NEPRA has revoked a license it may: Permit the licensee to continue operating, subject to terms and conditions specified by NEPRA; Contract with a third party to take over operation of the facilities; or Appoint an administrator to take over operation of the facilities.

GPC was granted a Generation License on July 8, 2009 by NEPRA to engage in the generation business for a term expiring on December 30, 2035.

5.6

Tariffs

Under the NEPRA Act, NEPRA is responsible for the determination of tariffs. Changes to tariffs are notified by GoP, based on determinations by NEPRA. NEPRAs Tariff Standards and Procedures Rules, 1998 (the Tariff Rules) specify the standards by which tariffs should generally be determined and the procedures for the submission and adjudication of tariff petitions. The procedure set out in the Tariff Rules requires the submission of a petition to NEPRA for determination of a new or revised tariff by, or on behalf of, the relevant utility. After the filing of pleadings, NEPRA examines these and determines whether a hearing is required to arrive at a just and informed decision. Where a hearing is to be held, NEPRA adjudicates upon the tariff petition after

49

hearing all parties interested or affected by the petition, which have been permitted by NEPRA to take part in the proceedings. NEPRA is required to decide a petition within six months of it being filed. NEPRA is required to intimate its final order (on the tariff, charges and other terms and conditions) to the Federal Government for notification in the Official Gazette no later than three days from the date of such order. A tariff determined by NEPRA does not become effective until such time as it is notified in the Official Gazette by the Federal Government. Under the NEPRA Act, the Federal Government may within fifteen days of receipt of such intimation from NEPRA require it to reconsider its determination of the tariff, charges or other terms and conditions. NEPRA then has a further fifteen days to reconsider and, as appropriate, revise its determination and to intimate its new determination to the Federal Government. Once the tariff, charges or other terms and conditions have been determined by NEPRA and notified by the Federal Government, these can be reviewed by NEPRA either on its own motion or pursuant to a petition of any licensee, consumer or person interested in the tariff.

5.7

Transition to Competition

NEPRA is currently refining the plan for transition of the power sector to a competitive national power market. As an initial phase, the single buyer plus model has been established whereby NTDC functions as the sole purchaser of all electricity generated by the power producers, and meets the power sectors dispatch, system security and supply balance needs. Large, bulk consumers (with peak demands exceeding 1 MW) have the ability to contract directly with generators. The introduction of a wholesale market is envisaged for mid-2012.

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6.

THE PROJECT

The following diagram summarizes the Project and its various commercial dimensions. Figure 6.1: The Project
NTDC (CPPA) Single Buyer

GoP Guarantee under IA CMEC (with CERIECO) EPC Contractors Scott Wilson EPC Project Managers

PSO Fuel Supplier KPS O&M Contractors

Electric Power

Grange Power Ltd

25% Equity GHG (96%) Other Shareholders (4%)

75% Debt Foreign Banks and Institutions Local Banks (Arif Habib Syndicate)

6.1

Grange Power Limited

Grange Power Limited (GPL or the Company) was incorporated in Pakistan as a public limited company under the Companies Ordinance 1984, on March 25, 2008 (Certificate of Incorporation No. 0064883.) The certificate for commencement of business was issued on May 13, 2008. GPL applied to NEPRA for a generation license on December 16, 2008 and was granted one after due process on July 8, 2009 for a period expiring on December 30, 2035.

6.2

Objective of the Company

The purpose of the Company is to build, own and operate a modern power generation plant, for onward sale and supply of electricity to the National Transmission & Despatch Company. This includes all acts directly or indirectly related or incidental to running the affairs of the Company.

51

6.3

The Project

The Project is a brand new dual-fired Combined Cycle power generation plant, having a gross capacity (at ISO conditions) of 163.353 MW. The primary fuel for the power plant is Residual Fuel Oil with High Speed Diesel as the back-up fuel.

6.4

Plant Site

The Project is based in Arifwala, in the Punjab province of Pakistan. The site for the power plant is spread over a vast area of 30 acres located at Kamair at 15-km Arifwala-Sahiwal Road, in Tehsil and District Pakpattan. The site was allocated by NTDC to GPL in May 2008 after ensuring the suitability of the site for the proposed IPP. Joint visits have been carried out by PPIB and NTDC teams and load flow studies carried out to ascertain the technical viability of the location and its vicinity to a 132 kV grid station, as per system requirements. The area has the necessary infrastructure in place and is easily accessible through a newly constructed metal road. Environmental Impact Assessment (EIA) studies have also been conducted by Pakistan Engineering Services and the Project has been found to be in compliance with the National Environmental Quality Standards (NEQS). The report has been filed with the Environmental Protection Department, Government of Punjab, and an NOC expected shortly. The allocated land was acquired by GPL at the cost of PKR 675,000 per acre, or a total of PKR 20.25 million (equivalent to approximately USD 247 million), and was duly transferred to GPL on August 7, 2009. Topographical survey of the area has been carried out by Berkeley Associates, a well known consulting engineering firm based in Lahore providing geotechnical, and site evaluation services. A geotechnical investigation, site clearing and preliminary grading have also been carried out.

52

Figure 6.2:

GPLs Topography

6.5

Plant Capacity

The gross capacity of the plant under ISO conditions is 163.353 MW, whereas under mean conditions at site it is estimated at 152 MW. Dependable net capacity under site conditions is estimated at 146.5 MW, as explained in the table below. Total gross generation at 60 percent plant factor is determined to be about 799 GWh per annum, with net annual dispatch of 770 GWh. Table 6.1: Plant Capacity and Generation Capacity Gas Turbine at ISO conditions Steam Turbine at ISO conditions Estimated Name Plate Capacity at ISO conditions Percentage Auxiliary Consumption Unit Auxiliary Consumption Capacity/ Plant Factor De-rating Due to Site Conditions (atmospheric correction) Power Generation Gross Capacity After Aging at Site Dependable / Net Sent Out Capacity Gross Annual Generation at 60% Plant Factor Net Annual Dispatch

109.00 MW 54.353 MW 163.353 MW 3.62% 5.50 60% 6.95% 152.00 MW 146.50 MW 798.91 GWh 770.00 GWh

It is possible to increase the capacity of the plant up to 180 MW if run on gas. The project was initially envisioned to be gas-fired but had to be changed to RFO due to gas shortage. In such future instance if gas becomes available for the Project, the plant may be switched over to gas at no major cost.

53

6.6

Engineering Procurement & Construction Agreement

In November 2008, the Company signed a turnkey Engineering Procurement & Construction (EPC) Agreement with China National Machinery & Equipment Import & Export Corporation (CMEC) as the Lead Engineering and Procurement (E&P) Contractor, and its subsidiary China East Resource Import & Export Corporation (CERIECO) as the Construction Contractor (both collectively, the Contractors). A comprehensive EPC contract is expected to be finalized and signed by April 2010. This tripartite agreement is based on a turnkey arrangement whereby the entire design, procurement, engineering, manufacturing, transportation to site, erection, construction, installation, commissioning and performance testing of all plant and equipment shall be the responsibility of the two contractors, according to the scope of work agreed in the EPC Agreement and further elaborated in the E&P Contract and Construction Contract to be signed by the Company with CMEC and CERIECO, respectively.

6.6.1 Layout Plant and Buildings A layout plan for the Project has been prepared by CMEC as provided below, with the list of buildings and structures planned to be constructed at site, in Table 6.2. Figure 6.3: GPL Plant Layout

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Table 6.2: List of Buildings and Structures for the Power Project 1 Heat Recovery Steam Generator 15 Oily Waste Water Treatment House 2 Gas Turbine 16 Auxiliary Boiler 3 Steam Turbine Hall 17 General Water Pump House 4 Auxiliary Building 18 General Water Basin 5 Cooling Basin 19 Industry Waste Water Treatment Station 6 Main Transformer for Gas Turbine 20 Domestic Waste Water Treatment Station 7 Main Transformer for Steam Turbine 21 Domestic Water Pump House 8 Auxiliary Transformer 22 Drainage Water Pump House 9 Station Transformer 23 Acid and Alkaline Storage Area 10 132kv Switch Yard 24 Chemical Tank 11 132kv Substation Control Building 25 Chemical Water Treatment Building 12 Emergency Oil Pit for Transformer 26 Cooling Tower 13 Oil Tank 27 Work Shop 14 Fuel Oil Treatment Plant 28 Ware House * GPL has acquired sufficient land for the Project to accommodate capacity expansion up to 325 MW

6.6.2 Machinery and Suppliers As per the EPC Agreement, brand new plant and machinery for the Project shall be sourced from China and France. Accordingly, lists of the main equipment to be used for the plant, and their agreed qualified vendors are provided in the tables below. For each equipment listed in the two tables, the EPC Contractor is obliged to purchase from the listed vendors. However, any other equipment not listed therein may be procured by the Contractor as deemed appropriate.

Table 6.3: Sourcing of the Main Equipment Machinery Gas Turbine Gas Turbine Generator Steam Turbine and Generator Qualified Vendors GE France Qualified GE vendors (Elin, Alstom or Brush) Nanjing Steam Turbine Co. Ltd Harbin Steam Turbine Co. Ltd Shangai Steam Turbine Co. Ltd Hangzhou Boiler Group Co. Ltd No. 703 Design Institute of CSIC

Heat Recovery Steam Generator

55

List of the agreed qualified vendors for the balance of plant (BOP) equipment is provided below:
Table 6.4: Sourcing of BOP Equipment

Machinery Gas Generator Circuit Breaker 132kV Circuit Breaker

Qualified Vendors ABB, Siemens, Areva Xian H.V. Switchgear Co. Ltd Pingdingshan H.V. Switchgear Co. Ltd ABB China Siemens China TBEA Hengyang (or Shenyang) Transformer Works Liaoning EFACEC Electric Equipment Co. Ltd Xi Dian Changzhou Transformer Co Ltd Xian Transformer Co Ltd GE Xinhua China ABB China Yokogawa Xiyi Co China Cummins China Guangzhou Diesel Engine Co. Ltd Jinan Diesel Engine Co. Ltd Fujian Fufa Power Generating Equipment Co. Ltd. KSB Shangai Sulzer Dalian China State Grid Zhengzou Power Equipment Co Ltd Shenyang Pump Co. Ltd. Jiangsu Seagull Cooling Tower Co. Ltd. Henan Qinling Cooling Equipment Co. Ltd Zhejiang Lianfeng Co. Ltd Beijing Efficiency Environmental Engineering Co. Ltd Xian Chuangyuan Water Treatment Engineering Co. Ltd Jiangsu Huaguang Water Treatment Co. Ltd Jiangsu Bada Water Treatment Equipment Co. Ltd Alfa Laval West Falia Dalian Energas

Step-Up Transformers

Distributed Control System

Black Start & Emergency Diesel Generator

Boiler Feed Pumps

Cooling Tower

Demineralization Plant

Heavy Oil Treatment System

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6.6.3 EPC Timeline Work on engineering, procurement and civil works is expected to commence in June 2010 and be completed over a period of 26 months, with the trial run envisaged in August 2012, followed closely by the commencement of commercial operations. As GPL is being established under the Fast Track policy, it shall have to be completed within the stipulated time and achieve COD by August 2012. The construction schedule developed by CMEC is provided in figure 6.4. It is expected to formally begin in June 2010 though some of the initial tasks listed have already been accomplished.

6.6.4 EPC Costs The cost of plant and machinery is estimated at USD 122.38 million, with other EPC costs of USD 41.97 million, adding up to a total of USD 164.35 million. It is envisaged that out of these, USD 28 million shall be onshore costs and the remaining USD 136.35 million imported components.

Of the total offshore EPC cost of USD 136.35, an estimated USD 40 million worth of machinery shall be sourced from France essentially comprising of the GE Gas Turbine 9171E from GE France. The remaining 70 percent of the plant and equipment shall be sourced from various top vendors in China.

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Fig 6.4: EPC Timeline

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6.7

Tariff Determination

Grange Power Ltd submitted a petition to NEPRA on December 15, 2008 for determination of a 25-year tariff for the Project. NEPRA determined the tariff (US 12.4598 per kWh on a levelized basis) on June 26, 2008. A petition for review of this tariff was filed by GPL on July 7, 2009 with an appeal to NEPRA for tariff revision. After a formal review, NEPRA determined the final tariff on December 30, 2009, raising it to US 12.4778 per kWh (on a 25-year levelized basis). The detailed tariff schedule is provided in Appendix A: Detailed Tariff Schedule, to this Information Memorandum. The tariff is designed to cover the projected fuel cost, variable operating and maintenance charges, fixed operating and maintenance costs and insurance expenses while providing sufficient cashflows to service debt and provide a return on equity of 15 percent over the project life. The tariff determination permits GPL to generate bulk electricity for sale to Central Power Purchasing Agency (CPPA) of the NTDC under the terms of a Power Purchase Agreement (PPA) which is expected to be signed by June 2010. Pricing for electricity sold under the PPA, would be governed by this determination, which allows GPL to charge the following tariff rates, subject to adjustment of capacity purchase price on account of net dependable capacity and net thermal efficiency as determined by the test jointly carried out by the NTDC at COD: Table 6.5: GPL Tariff Determined by NEPRA* Tariff Components Capacity Charge (PKR/ kWh) O&M Foreign O&M Local Cost of Working Capital Insurance Debt service-Local Return on Equity ROE during Construction Total Capacity Charge Energy Charge on Operation on RFO (PKR/ kWh) Fuel Cost Component Variable O&M Foreign Local Levelized Tariff (at 60% Plant Factor)
*Tariff based on: Net Capacity Reference Exchange Rate Reference Fuel Price (inclusive of Freight)

Year 1-10 0.1116 0.0840 0.1031 0.1391 2.0910 0.5129 0.0552 3.0969 5.4625 0.4691 -

Year 11-25 0.1116 0.0840 0.1031 0.1391 0.5129 0.0552 1.0059 5.4625

Indexation USD/PKR & US CPI WPI KIBOR USD/PKR KIBOR USD/PKR USD/PKR

Fuel Price

0.4691 USD/PKR & US CPI US 12.4778/ kWh

146.5 MW PKR 80.45/USD 27,770 PKR/MT

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6.8

Tariff Structure

The tariff structure comprises of the following key components: 6.8.1 Capacity Purchase Price The Capacity Purchase Price (CPP) consists of two parts: An Escalable component, covering fixed Operating and Maintenance (O&M) costs (both foreign and local), insurance, equity returns and interest on working capital. The Escalable costs are indexed for inflation and foreign exchange variation, through a mechanism which seeks to provide GPL with a measure of protection against domestic and international prices due to inflation and foreign exchange movements. A Non-Escalable component which covers costs not indexed to inflation. It is split into debt servicing of loans denominated in Pakistan Rupees as well as foreign currency, and withholding taxes. 6.8.2 Energy Purchase Price The Energy Purchase Price (EPP) consists of the following: Fuel cost which is effectively a pass through item. Variable O&M cost which covers repairs and maintenance, oil, grease, chemicals, major overhaul costs and other miscellaneous costs. This is largely foreign currency denominated and adjusted accordingly. The tariff also contains provisions for indexation for inflation and exchange rate adjustments which are discussed in detail below. 6.8.3 Tariff Adjustments to CPP Components Dependable Capacity Both the escalable and non-escalable components of the CPP are dependent on a one-time adjustment to reflect the difference between the dependable capacity initially set by NEPRA using a set of default values, and the actual capacity to be determined through a dependable capacity test at commissioning. Fixed O&M Costs The local part of the fixed O&M component shall be adjusted by inflation (Wholesale Price Index or WPI) whereas the foreign component of fixed O&M will be adjusted on account of variation in US Consumer Price Index (CPI) and Dollar- Pak Rupee exchange rate. The adjustment will be quarterly and made on July 1, October 1, January 1 and April 1, based on the latest available information with respect to WPI notified by the Federal Bureau of Statistics (FBS), US CPI issued by US Bureau of Labor Statistics and revised TT/ OD selling rates of US Dollar notified by the National Bank of Pakistan (NBP).

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Insurance The insurance component will be adjusted as per actual on yearly basis. The insurance component of tariff is capped at 1.35% of the EPC cost and shall be treated as pass through. Returns on Equity Return on equity (ROE) and return on equity during construction (ROEDC) will be adjusted quarterly on the basis of variation in the PKR/USD parity. Non-Escalable CPP components The Non-Escalable components of the CPP include local debt servicing and cost of working capital. These are generally linked to KIBOR and not directly indexed to inflation or foreign exchange movement. 6.8.4 Adjustments to EPP Components Fuel Cost The Fuel cost component has been structured such that fluctuations due to changes in set fuel prices and fuel mix are effectively passed through. In determining the rate for the fuel component, a set of default heat rates were assumed by NEPRA. Again, to reflect the difference between these default heat rates and the actual heat rates, the fuel component for each unit is subject to a one-off adjustment following a heat rate test at COD. The first adjustment in the fuel component will be made after heat rate tests at commissioning. The revision in RFO prices shall also be made at the time. Variable O&M Costs This component is a foreign currency denominated charge and like the fixed O&M component adjusted on the basis of reference US CPI as of December 2008, revised US CPI and the revised TT/ OD selling rate of US Dollar as notified by NBP.

6.9

Taxes

GPL shall not be subject to taxation in Pakistan on its profits and gains derived from the electric power generation, during the term of the PPA. Accordingly, there is no provision for income taxes in the tariff. If GPC is obligated to pay any tax on the income purely generated from its operations, the exact amount should be reimbursed by CPPA on production of original receipts. Withholding tax on dividend is also a pass-through item just like other taxes as indicated in GoPs guidelines for tariff determination for new IPPs.

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6.10 Summary of Key Agreements and Contracts

6.10.1 Power Purchase Agreement An approved standard Power Purchase Agreement draft has been provided to GPL by the PPIB. The PPA is expected to be negotiated and signed by June 2010, between Grange Power Ltd and National Transmission & Despatch Company Ltd (or the Power Purchaser), the sole purchaser of electricity generated by GPL. One of the most important elements of the PPA is the tariff which has already been determined by NEPRA, as discussed in detail in section 6.7. The 25-year tariff (US 12.4776 per kWh, levelized) forms the base of the PPA and allows the necessary revenue predictability and consistency that is key to any investment. Key features of the intended PPA are as follows: The term of the PPA shall be in line with the tariff term determined by NEPRA, therefore 25 years. The Company shall not, without prior written approval of the Power Purchaser, sell or deliver electric energy produced at the plant or make available its capacity to any person other than the Power Purchaser From and after the COD, GPL shall make available the agreed declared available capacity, deliver and sell the dispatched net electrical output at the interconnection points, and provide ancillary services to the Power Purchaser. From and after the COD, the Power Purchaser shall pay GPL for the declared available capacity, take delivery and pay for the dispatched and delivered net electrical output The Company will design, engineer, construct, insure, commission, operate and maintain the GPL facility to be located on the site. The total contract capacity is expected to be approximately 146.5 MW (equivalent to the net generation of the plant) which would be contracted to be purchased by NTDC for the entire term of the PPA. The Date on which notice from the PPIB of the occurrence of financial closing is received by the Power Purchaser, the PPA shall become effective in its entirety. At any time after the financial close but prior to the occurrence of commercial operations date, the company may elect to reduce the contract capacity by an amount not to exceed ten percent (10%) in aggregate of the contract capacity, upon payment of damages. On the Effective Date, the Company shall have delivered to the Power Purchaser the letter of credit, and the Power Purchaser shall notify PPIB of this receipt and request PPIB to return the performance guarantee to the Company. If the Companys letter of credit is not received by NTDC in the agreed time and form as reasonably acceptable to it, the Power Purchaser may deliver written notice to the Company terminating the PPA. An operating committee shall be formed comprising of six (6) members and each party shall designate three (3) members for the said committee. The committee shall develop procedures for holding of meetings, keeping minutes of meetings and appointment and operation of sub-

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committees. The chairmanship of the committee shall rotate each six (6) months between the parties. GPL shall commence and proceed with the EPC works as soon as reasonably practicable following the financial closing. The Company shall ensure that the design of EPC works shall be carried out with all proper skill and care and in all material respects in accordance with the PPA, including the technical specifications, the laws of Pakistan, prudent utility practices and prudent electrical practices, so that the Project is reasonably expected to provide useful life of not less than the PPA term. The Company may undertake scheduled outages only according to the schedule which has been proposed by the Company. On or before the financial closing, the Company shall provide reasonable evidence to NTDC that the Company has procured from a reliable supplier and transporter, through one or more commercially reasonable fuel supply agreements, supplies of fuel and the capacity to process, transport, store and handle fuel for use at the plant. The company shall on the site maintain an inventory RFO of thirty (30) days at full load. NTDC shall be responsible for the design, construction, financing, completion and commissioning of the Power Purchaser interconnection facilities whereas GPL shall carry out the Companys interconnection works with proper skill and care in all material respects. The Company shall at its own expense install the metering system and back up metering system for determining net electrical output for the plant. Prior to synchronization of the plant with the grid system, the independent engineer shall deliver to the Company and the Power Purchaser the certificate of readiness for synchronization. From and after the commercial operations date, the Power Purchaser shall pay the Company the capacity payments for the available capacity for each month (or part-month) and energy payments for dispatched and delivered net electrical output for the relevant month (or part-month). If the Company is in breach of its obligations to achieve the COD by the required time, then for each month thereafter until the COD is actually achieved, the Company shall pay the Power Purchaser as liquidated damages an amount equal to USD 3.0 per kW of the contract capacity per month.

6.10.2 Implementation Agreement An approved standard Implementation Agreement (IA) draft has been provided to GPL by the PPIB. The IA shall be negotiated and signed between Grange Power Ltd and the President of the Islamic Republic of Pakistan on behalf of the Government of Pakistan. The timing of the signing of the IA is planned to coincide with the signing of the PPA, as they are both intrinsically linked. The Management of GPL expects to sign the IA and the PPA together by June 2010. The key features of the IA are as follows: The term of the IA shall most likely be 25 years, in line with the tariff term determined by NEPRA which would also be the basis for the PPA. Within five business days of receiving the notice in writing by GPL that the financing documents have been executed and all conditions precedent for initial availability of funds under financing 63

documents have been satisfied and the delivery of the Company letter of credit in accordance with the terms of PPA has been made, the GoP shall execute and deliver to the Company the Guarantee. If the financial closing does not occur in accordance with the requirement of the LoS, then upon termination of the LoS, the IA shall also terminate in its entirety. The Company shall be responsible to design, insure, finance, acquire, construct, complete and commission the Project, and shall own, operate and maintain the Project in accordance with all applicable laws of Pakistan, the Company consents, the IA and the PPA GPL shall obtain adequate water supplies for the Project at the site acquired by the Company GPL shall make arrangements for the delivery to and receipt at port facilities in Pakistan of equipment and materials necessary for the construction of the plant and shall make arrangements for the transport to the site of all such equipments and materials from the port Upon timely request of the Company, GoP shall support and use all reasonable efforts to expedite consideration of GPLs applications for consents and approvals to ensure smooth and efficient operations of the Project The Company shall provide sufficient security for the protection of the plant. The GoP may be requested by the Company to provide additional security if required at a reasonable cost to the Company. The Company shall obtain and maintain insurance from financially strong and internationally reputable insurance companies. During the term, the Company shall not be subject to taxation in Pakistan on its profits and gains derived from the electric power generation under the PPA. Local investors will be taxed according to the applicable laws of Pakistan while foreign investors will be governed by the bilateral tax treaties, if any. Where no such treaty exists with the respective countries, foreign investor shall be taxed in accordance with the applicable laws of Pakistan. The GoP encourages the Company to incorporate as much locally produced material, equipment and supplies as possible for the design, construction, completion, operation and maintenance of the Project. GPL shall be entitled to import any plant, equipment and machinery for the Project, not locally manufactured, prior to the COD without restriction and is exempt from sales tax but subject to payment of applicable customs duty not to exceed 5 percent on value. All plant and machinery imported for the complex will be cleared for release from customs and available for removal by GPL or its agents within thirty (30) business days, following GPLS written notice to PPIB of a delay by the Customs in the release of such plant and machinery. GPL shall be entitled to export any items of plant and machinery for the purpose of repair outside Pakistan and to re-import the same upon payment of applicable Customs duties. The exchange and transfer abroad of all foreign currency related to the Project shall be governed by the laws of Pakistan. Neither the GoP nor any public sector entity shall take any discriminatory action which materially and adversely affects the Project or performance of the Companys obligations. The GoP ensures that neither it nor the Power Purchaser or any public sector entity will expropriate, compulsorily acquire, nationalize, or otherwise compulsorily procure any ordinary share capital or material assets of the Company.

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6.10.3 Fuel Supply Agreement The Company is currently in negotiation with Pakistan State Oil Company Ltd (PSO), the largest stateowned oil marketing company in Pakistan. GPL has held several discussions with various major suppliers towards establishing a long term fuel supply contract for the power plant. The fuel is readily available both locally as well as through importers. However, significant progress has been made in negotiations with PSO who have submitted their final draft Fuel Supply Agreement (FSA) to GPL for further discussions. The FSA is planned to be finalized and signed by June 2010, between Pakistan State Oil Company Ltd and Grange Power Ltd. Key features of the intended FSA are as follows: The FSA shall cover a long term and may be valid up to thirteen (13) years after COD. The FSA may be terminated before the expiry date or extended beyond the expiry date, as per the terms defined therein. GPL shall purchase all its requirements of RFO and/or HSD for the plant from PSO and PSO shall sell to the Company all its requirements of the said fuels Upon placement of firm order by the Company, the fuel supplier shall be obliged to deliver at site the entire quantity of fuel subject to maximum daily quantities. The Company shall agree to uplift a minimum quantity of fuel per year that is equivalent to 25 percent of the fuel quantity required to operate the plant at full contract capacity. Otherwise, PSO shall be recompensed for the amount of gross margin for such fuel, based on the average margin calculated for the year. Fuel delivered to the Company shall meet the relevant specification as defined in the FSA. Upon acceptance of delivery of fuel or diesel oil by GPL not meeting the relevant standards, the delivered fuel shall be considered as meeting the relevant specifications. The Company shall at its own cost and expense design, construct, install and maintain such facilities as are necessary for the purpose of receiving, storing, and using fuel to be supplied by PSO. This shall include fuel storage tanks having at least thirty (30) day capacity, a tank lorry decanting facility and other receipt facilities capable of decanting a minimum of 2000 tonnes per day The fuel supplier shall arrange to design, construct, install and maintain all such facilities, equipments or arrangements as the fuel supplier deems necessary in order to be able to effect fuel deliveries at the delivery point. The Company shall provide at least sixty (60) days notice to PSO of the Initial Delivery Date. And for future deliveries, the Company shall provide monthly and weekly requirement plans to the fuel supplier. Parties shall consult from time to time to develop and refine requirement estimates for subsequent months. The Company may amend its firm order up to 20 percent of the quantities of the applicable month, 15 days before the applicable month. The price payable by the Company for fuel shall be that set out in the High Sulphur Fuel Oil (HSFO) price notification applicable on the date of the relevant invoice. Any taxes or levies payable on the supply shall be added to the price. The fuel supplier may increase the gross margin on the basis of a directive from the GoP or OGRA and subject to NEPRAs approval. 65

In case of failure by the fuel supplier prior or following the COD, the fuel supplier shall indemnify the company for any costs, damages, losses or penalties.

6.10.4 Engineering & Procurement Contract and Construction Contract The E&P Contract with CMEC and the Construction Contract with CERIECO shall be based on the existing tripartite agreement between GPL and the two associate companies or Contractors detailed above in sections 6.6. The Company expects to sign these two contracts simultaneously in April 2010. The broad scope of work agreed in the current EPC Agreement is provided below: Owners Scope of Work Site Survey Site improvements and foundation treatment Design and construction of non-industrial buildings and structures The supply and erection of ventilation, air-conditioners, lighting, water supply and drainage system, earthing for buildings and furniture Contractors Scope of Work Engineering Services: The complete design and engineering services shall be provided for supply, construction, erection, installation and commissioning of the complete specified plant. Civil Works: These services would include construction of building and structures, foundations for buildings and plant, as well as building services for various structures as appropriate Power Generating Equipments: The GE Gas Turbine Generator Unit PG 9171E will be supplied by the Contractors. The complete gas turbine generator package will comprise of all the required main sub systems with all standard auxiliaries. Steam Turbine Generator (Nanjing Steam Turbine Co Ltd, Harbin Steam Turbine Co Ltd or Shanghai Steam Turbine Co Ltd) Heat Recovery Steam Generator (Hangzhou Boiler Group Co Ltd or No. 703 Design Institute of CSIC) Cooling water system Mechanical Systems: Liquid Heavy Fuel Oil System Water Supply Systems Chemical Water Treatment System Fire Detection and Protection Systems Balance of Mechanical Equipment and Auxiliary Systems Electrical Equipments: 132 kV switch yard Black Start Diesel Generator MV Power Distribution 66

LV Power Distribution and Services Cable Systems Miscellaneous Control and Instrumentation Training: On-site training of O&M staff shall be for one month for theoretical and practical training on all systems and plant operations (mechanical, electrical, control & instrumentation systems and components, and Control Room.) Tools and Spares: Complete set of special tools necessary for erection and maintenance of various plants and equipments to be installed shall be provided by the Contractors, along with special lifting and handling appliances and one set of commissioning spare parts Documentation: All necessary documentation shall be provided, including six sets of O&M manuals for all main and auxiliary equipments, complete set of hard and soft copies of As-Built Drawings and DCS loop drawings, detailed vendor lists for major equipments, other drawings and calculations (inputs and results), progress reports, inspection and commissioning records, and quality control documentation. 6.10.5 Project and Construction Management Contract GPL is in negotiation with Scott Wilson Group plc (Scott Wilson), the global design and engineering consultancy firm based in UK, for providing project management services during construction. The terms and scope of work being discussed with Scott Wilson include: Scott Wilson, as the Project Manager, will review the EPC Contractors design submittals against agreed terms of reference based on the EPC contract specifications, PPA specifications and the FSA. The design shall be evaluated in line with international best practices. Review and approval of the EPC Contractors Inspection and Test Plan will be undertaken as part of the design submittal review. The EPC Contractors commissioning plan and performance test proposals will be reviewed to assess the effect of the commissioning and performance test plans on the plant design and construction planning. The project and construction management will address the following main elements: Mobilization and commencement of the EPC contract Contract administration including payment certification, change order review and approval, cost management, contract close out Progress and schedule review, monitoring and reporting Review and monitoring of Contractors permit application and third party liaison Review and monitoring of Contractors works quality Review and monitoring of Contractors HSE procedures and compliance Site testing and inspection witnessing and approval Maintenance and management of punch lists and expediting close-out Commissioning coordination, monitoring and witnessing, including mechanical completion checks, pre-commissioning checks and commission in checks Management and review of O&M manuals and as-built documentation development 67

Monitoring and review of operator training by the Contractor Management of plant takeover processes

6.10.6 Operation and Maintenance Contract GPL is currently in negotiations with Korea Plant Services & Engineering Co Ltd (KPS) to provide operation and maintenance services for the proposed IPP. The arrangement being discussed envisions two contractual phases: Phase 1 covering a pre-commencement and mobilization period of 6 months before COD. This phase to include the setting up of the Operator on base, recruitment and training of manpower, preparation and submission of standard operating procedures, preparing the plant for commercial operations and ensuring a seamless transition from construction phase to commercial operations. Phase 2 covering the post-COD period until a mutually agreed termination date, possibly after 25 years. The Operator to provide the regular commercial operating and maintenance services for the plant and the Owner to provide all spare parts, chemicals, fuels, lubricants and other consumables.

6.10.7 Local Loan Agreement GPL is at an advanced stage of negotiations with Arif Habib Bank Ltd (AHBL) to act as the Co-Lead Arranger for syndicated project financing for the Company. AHBL, along with a group of other banks has agreed in principle to act as Senior Lenders to extend the following facilities to GPL: a syndicated Term Finance Facility (TFF) to arrange funding for the local component of the EPC cost i.e. USD 28 million a syndicated working capital facility or Running Finance Facility (RFF) Standby Letter of Credit Facility (SLCF) for issuance of the standby letter of credit to be provided to the Power Purchaser, under the PPA Key features of the indicative term sheet are provided below: The currency to be Pakistani Rupees in case of TFF and RFF; and either PKR or US Dollars in case of SLCF. AHBL to act as the Financial Advisor, Co-Lead Arranger, Agent Bank and Security Trustee under this loan arrangement The Availability Period for the TFF shall be 24 months or such other date as may be agreed in the facility documents Drawdown of the TFF shall be in bullets or tranches during the Availability Period, linked with EPC payments where applicable The tenor of the TFF shall be up to a maximum of 12 years or such other tenor as agreed in facility documents

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Markup rate for the TFF shall be the Base Rate plus 300 basis points (bps) per annum; and for the RFF it shall be Base Rate plus 200 bps per annum. The Base Rate is defined as three months Karachi Interbank Offered Rate (KIBOR) which is to be reset on a quarterly basis Principal repayment in respect of TFF to be made over up to 40 consecutive quarterly installments with the first such installment to fall due at the end of the 27th month of the effective date or three (3) months after COD, or as agreed in the facility documents. Markup payments in respect of the TFF to be made on a quarterly basis, with the first payment coinciding with the repayment of principal Final security structure shall be finalized after due diligence.

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7. PROJECT SPONSORS AND CONTRACTORS

7.1 Ownership and Control

The total project cost for setting up the plant is estimated at USD 218.2 million, with a 75:25 debt-equity structure. Total equity in the structure, amounting to USD 54.5 million, is held 96 percent by GHG and the remaining four (4) percent are equally held by Albario Engineering (Pvt.) Ltd, Mr. Assad Sheikh, Mr. Shuja Hussain and Mr. Amjad Faquir. The current equity structure of the Company is given below: Table 7.1: Current GPL Shareholding Structure Shareholders/ Sponsors Grange Holdings Group Albario Engineering (Pvt.) Ltd Mr Assad Sheikh Mr. Shuja Hussain Mr. Amjad Faquir Total Shareholding 96% 1% 1% 1% 1% 100% No. of Shares 421,291,825 4,388,457 4,388,457 4,388,457 4,388,457 438,845,651

Profiles of these Sponsors and shareholders are provided later in this section.

7.1.1 Shareholder Control Under Pakistan law, the level of control that can be exercised by a shareholder varies as follows: Table 7.2: Shareholder Control Percent of total share capital Greater than 25% and up to 50% Greater than 50% and up to 75% Greater than 75% Level of Control Negative control: ability to block special resolutions Negative control + control over ordinary resolutions Control over both ordinary and special resolutions

7.1.2 Board of Directors The general direction and administration of the affairs of GPL shall be vested in the Board of Directors, which has the overall responsibility for the organization. The Board currently includes three (3) First Directors of the Company as per the Companys Memorandum of Association, namely Mr. Assad Sheikh, Mr. Shuja Hussain and Mr. Amjad Faquir. These Directors shall hold office till the first Annual General

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Meeting. The structure, procedure for membership and terms of office of members of the Board are set out in the Memorandum and Articles of Association of the Company.

The Directors elect one of their members as the Chairman of the Board for a period of three years. Currently, the Chairman of the Board is Mr. Assad Sheikh. The first Chief Executive of the Company, appointed as per the rules, is Mr. Shuja Hussain who shall hold office till the first Annual General Meeting.

7.2

Shareholder Profiles

7.2.1 Mr. Assad Sheikh Mr. Assad Sheikh is the Chairman of the Board of Directors of GPL, and a direct holder of 1 percent of the total equity in the Project. Mr. Sheikh has around 30 years of professional experience in a diverse portfolio of sectors. He completed his education at Leicester University to accountancy foundation level in 1979, and then served his articles with PAH Bromwich & Co. a Chartered Accounts firm in Leicester until 1984. He joined Halal Meat Co Ltd in 1984 where he was appointed as the Financial Director of the company. He proved to be a valuable member of the team, responsible for a 400 percent growth of the company during the period 1984 to 87. In 1987, he founded a property development company registered with the National House Building Company (NHBC), which by 1992 had grown into a large British company with an impressive project portfolio of hotels, residences and commercial properties. In 1992, he relocated to Pakistan. During the same time he also set up Rocklander Shoe Corporation. More recently, Mr. Assad Sheikh has been involved at the founder level in establishing a group of nursing homes and Psychiatric hospitals for the elderly including Learning Disability Homes and independent hospitals in UK). In the year 2000, he co-founded the Beacon Care Group of companies responsible for providing care for people with learning disabilities. In 2004, he became the founder Director of Mosaique Hotel SAS in 2004. Mosaique has completed the development of a 275-room Holiday Inn in Paris, France. In April of 2005, Assad acquired Glancestyles Holdings Ltd, a company operating in the psychiatric care sector. In 2007, a further acquisition in the hospital sector was made whereby the Inmind Healthcare Group of companies was acquired. The company now owns and operates 6 units and is expanding its existing facilities by way of development substantially. Currently, Mr. Sheikh and his family are the beneficiaries of GHG which holds these diverse investment projects spread over UK, France, Spain, UAE and Pakistan. The GHG group was founded in 1996 by making investments in the UK healthcare sector, after which sporadic investments followed resulting in 71

a more comprehensive investment portfolio spanning five countries. He is responsible for overseeing the financial and operational control of the businesses.

7.2.2 Mr. Shuja Hussain Mr. Shuja Hussain is the Chief Executive of GPL, and a Director shareholder of 1 percent of the total equity in the Project. Mr. Shuja Hussain has 28 years of professional experience under his belt, and has held strategic positions at various trade and manufacturing organizations. He completed his graduation from Pakistan, before obtaining a diploma in Business Management, from IMI Cornilious Group, Anoka, USA. From 1980 to 1982, he served as the Commercial Director of Trade and Traders (Pvt.) Ltd, a large carpet exporting company based in Pakistan. In 1982, he joined Big Mac Foods (Pvt.) Ltd, a franchise of Coca Cola International, as Director Marketing, until 1986. In 1986, Mr. Hussain founded a 200 MT per day Chishtian Flour Mills (Pvt.) Ltd, and remained at its helm as the CEO, up till 1999, after which he left for UK. He established a chain of supermarkets in UK from 1999 to 2007 when his commitments back home forced him back to Pakistan, and the supermarket chain had to be leased out. Mr. Shuja Hussain established Arsh Gas Ltd In 2007, LPG storage and filling business with 240 tons of LPG storage capacity, located at Mustafabad Tehsil District, Okara, Punjab. Arsh Gas has the capacity to undertake own operations as well as be available as a common user facility for other LPG marketing companies. As of 2008, he is in the process of setting up a 163 MW Combined Cycle power plant, as its Chief Executive.

7.2.3 Mr. Amjad Faquir Mr Amjad Faquir is a director of GPL and a 1 per cent shareholder in the company. Mr Amjad Faquir completed his Business studies Diploma at Loughborough College in 1985 and then went on to complete his Commercial Pilots Licence in 1987 in California USA. He started his professional business career in 1988 with the development of a property healthcare portfolio located in the midlands further developing to spread across the UK. In 1997 Mr Faquir was Co-Founder and shareholder of Beacon care PLC, operating twenty registered homes with the Commission for Social Care Inspection (CSCI).

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In 1999 Mr Faquir ventured into the hospitality sector establishing a branded hotel in the Midlands and in 2004 Co-founded the Mosaique Hotels SAS. Mosaique has completed the development of a 275 room Holiday Inn Hotel in Paris, France. In April 2005 Mr Faquir acquired Glancestyles Holding Ltd, a company operating in the Independent Hospital Sector. In 2006 Mr Faquir went on to create the Inmind brand, in which its principle activity is to operate in secure forensic hospitals, with the acquisitions of Anwick Ltd and Inmind Ltd expanding the hospital portfolio. In 2009 Mr Faquir secured planning to further increase the Inmind revenue by 100%. Additional to these responsibilities Mr Faquir acts as a Healthcare Consultant proving strategic development to a number of independent healthcare providers.

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7.2.4 Grange Holdings Group GHG is the largest shareholder and lead sponsor of Grange Power Ltd. It currently holds 96 percent of the total equity. A brief business profile is provided hereunder. For further details reference may be drawn to GHGs website (www.grangeholdings.com). 1. Business Profile The Grange Holdings Group is an offshore company established in 2002, having investments in a diverse portfolio of sectors and markets including property and real estate development, tourism and hospitality, healthcare (physical and psychiatric), and social sectors. Projects have wide geographical spread, spanning United Kingdom, France, Spain, UAE and Pakistan. United Kingdom GHG has expanded its portfolio of Healthcare Assets in the UK since 1996. Its entry into the sector was through the provision of Elderly Care in the South East of England. This was followed in 2000, by investments in the niche market of Learning Disabilities for Adults. The strategy for the Group has been to be both an operator and provider of property assets. The Division has grown to own and operate 20 sites across London and the South East of England. In 2005 the Glancestyle Group of companies was acquired to further consolidate GHGs presence in the sector. Glancestyle specializes in the provision of Psychiatric medical care and provided GHG with the opportunity of participating in this highly lucrative segment of the healthcare market. The portfolio was further enhanced in 2006 by the acquisition of the Inmind Group. This Division now owns and operates four (4) hospitals with four (4) others under development, and ongoing expansion of existing sites by adding further facilities and bedroom stock. France In 2004, GHG added Mosaique Hotels SAS to its portfolio of Investments. Mosaique acquired and developed the first hotel in Paris, a 275 room Holiday Inn, which opened for business in 2006. The second project is the Crown Plaza with 185 rooms, which is underway on River Sein in Paris. Spain Marbella in Spain was the location for two prestigious developments of 38 town houses in a village setting. The developments were completed in 2005. 74

UAE The Group is currently developing prestigious villas on the Emirates Hill Golf Course in Emirates Hills, the highly sought after location in Dubai for villas. Pakistan Arsh Gas Limited in Okara is a fully integrated LPG facility providing storage and marketing operations for own as well as client LPG companies. Arsh gas has a 240 tonnes storage capacity, as well as a 2000 tonnes/day filling capacity. GHG invested in the sugar sector in 2007 by acquiring a sugar mill in Sindh, Kiran Sugar Mill, with a crushing capacity of 10,000 MT per day. GHG is in the process of divesting this mill, however it still owns 80% of the companys shares. A 163.35 MW Combined Cycle power generation project at Arifwala, in the province of Punjab, is also in the pipeline. 2. Financials (based on audited accounts as of February 28, 2008) Authorized Capital: Paid-up Capital: Total Asset Base: Total Liabilities: Net Asset Value: Net Profit (after taxes): USD 50,000 USD 1 USD 95,214,208 USD 4,158,729 USD 91,055,479 USD 559,080

3. Major Investments

Grange Holdings Group holds investments in the following major companies: Note: All Market Values given have been independently evaluated by the Cleland & Co Ltd (Chartered Accountant Group)

Eastleigh Holdings plc (100% shareholding) Eastleigh Holdings owns properties in Dubai, UAE and Marbella, Spain. It is responsible for the development of 38 town houses in Spain, and is presently involved in a villas project in the Emirates Hill Golf Course, in Dubai. *Market Value (est.): GBP 7,000,00010,000,000 *Note: Market Value estimates provided by Better Homes Ltd. (UAEIndependent Realtor)

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Allegony Limited (20% shareholding) Allegony Ltd is an investment company holding shares in the hotel industry. Brompton and Mosiac Investments SAS which individually own Chazey Court, as well as the Holiday Inn Paris along with an upcoming Crown Plaza Hotel Paris are part of the Allegony Limited umbrella. *Market Value (est.): GBP 4,784,329 *Note: This market value has been sourced from Savills estate agents.

Glancestyle Holdings Ltd (50% shareholding) Glancestyle Group of companies specializes in the provision of psychiatric hospitals. The Inmind Group is a provider of adult mental health facilities, and owns and operates two (2) open rehabilitation units, a community housing facility and an elderly nursing home. Gross Asset Valuation: GBP 65,000,000 Debt: GBP 14,000,000 Net Asset Value: GBP 51,000,000 Cayes Limited (50% shareholding) Cayes Ltd owns properties rented out to UK trading companies. These UK companies operate the properties to provide a range of adult mental health services under the brand name of Inmind. The Cayes Limited portfolio was enhanced with the inclusion of the Inmind Group in 2006. Gross Asset Valution: GBP 50,000,000 Debt: GBP 25,000,000 Net Asset Value*: GBP 25,000,000 * Following development of existing facilities expected to be completed by 2011, the Net Asset Value will increase to GBP 35 million. Penbridge Properties Ltd (50% shareholding) Penbridge Properties owns a property known as the Pickeridge Estate (132 acres), was conservatively valued in the latest accounts of GHG at the value of the share capital at the time. Since the acquisition, a two-phased development of the property has commenced to provide care facilities for adults with mental health issues. *Market Value (current est.): GBP 4,000,000 *Note: This market value shall be updated to GBP 20,000,000 upon the completion of a building complex on this piece of land.

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Beacon Care Holdings plc (37.5% shareholding) Beacon Care Holding is a trading company and a lessee to Kerdale and Allensbury (Kerdale and Allensbury are 50% subsidiaries of GHG), which each own properties rented out to Beacon Care Holdings. These properties were operated as care homes. In May 2008, almost the entire (90%) portfolio of properties was sold to the Caretech Group, a UK plc operating in the same industry for a figure in excess of GBP 37 million cash which is held with the firms legal counsel and partly available for investment in GPL. Gross Asset Valution: GBP 38,000,000 Debt: GBP 5,000,000 Net Asset Value: GBP 33,000,000

4. Contact Details

Current business address (UK): Ground Floor Management Training Centre Badgemore Park Golf Club Badgemore Henley-on-Thames, Oxfordshire RG9 4NR Tel: +44 (0) 1491 576544 Fax: +44 (0) 1491 576194 Current business address (Pakistan): 2nd Floor 65-Z Commercial Area D.H.A, Lahore Tel: +92 42 7029283, 7025282, 8320823 Fax: +92 42 5892743 Website: www.grangeholdings.com

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7.2.5 Albario Engineering Pvt. Ltd Albario Engineering (Pvt.) Ltd (AEPL) is a 1 percent shareholder in Grange Power Ltd. A brief business profile is provided hereunder, for further details reference may be drawn to AEPLs website (www.aepl.com.pk). 1. Business profile AEPL is a leading engineering company based in Pakistan, and has been in operation since 1954. It specializes in: Electromechanical Contracting Engineering Sourcing Project Management Operations & Maintenance Services Business (to support installed base) AEPL is an award winning General Electric preferred sales representative for new unit sales as well as spare parts. The company also extends after sales support to GEs local clientele. AEPL has executed projects and provided services in the following areas: Power Generation Transmission and Distribution Electro/Mechanical Contracting Operations and Maintenance Services Project Sales Engineering Consultancy Services Sponsor/Developer Spares and Services 2. Key projects and achievements Key projects undertaken by AEPL include: Mechanical Erection, Tank Fabrication, Electrical and Instrumental Works with Commissioning of Balloki Power Project O&M subcontractor for GEII for managing Operation and Maintenance of the 126 MW CC Habibullah Coastal Power Plant Consultancy Services provided to AES, Tractabel, EDF, Marubeni and Hitachi Supply of 220kV Substations at Jaranwala, Faisalabad, Gakkhar, Multan and Mardan Supply and Installation Support of 500kV Substations at Dadu, Jamshoro and Hala Road Supply and Installation of 2 110MW Units-Guddu Thermal Power Station Supply, 225MW GTs - FJFC, Karachi Supply of Power Island, 586MW Uch Power Project, Uch Sharif Supply and Installation of 225 MW Balloki Power Project (Orient Power) Supply and Installation of 225 MW Muridke Combined Cycle power 78

3. Contact details

plant (Saphire Power) Erection, Installation and testing of 640MW Hydro Power Station at Warsak Supply and Installation Support of 4100MW Hydro Power Station at Mangla Installation, Testing and Commissioning of 132kV Substation at Balloki and Muridke PS Installation of 25 Power Transformers 1000 kVA to 20MVA Erection of Steel Radial Gates Marala Barrage Laying of H.T. Cables Qadirabad Barrage Upgradation of 600 MW Guddu Combined Cycle Project Supply and Installation of 60 and 100MW Khulna Power Station-East Pakistan Supply and Installation of 60 and 100MW Chittagong PS-East Pakistan Corporate Head Office: P.O. Box 114, Rasul Building 60-Shahrah-e-Qauid-e-Azam, Lahore, Pakistan Tel: (92-42) 111-00-1954 Fax: (92-42) 6369756, 6361142 Corporate website: www.aepl.com.pk/

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7.2.6 China National Machinery & Equipment Import & Export Corporation CMEC, along with its subsidiary company CERIECO, has an EPC Agreement with Grange Power Ltd, as detailed in section 6.10.4. A brief profile of CMEC is provided below, for further details reference may be drawn to CMECs website (www.cmec.com). 1. Business profile Established in 1978 as the first Chinese national corporation integrating foreign trade with industry, CMEC deals principally with contracting international engineering projects, exporting complete plants and equipment, importing and exporting mechanical and electrical products, and engaging in external economic and technical cooperation. CMEC has a client network spanning 120 countries in multiple regions of the globe, with a comprehensive distribution and services network. CMEC has been selected as one of the top 225 International Contractors by the renowned Engineering News Record of USA since 1996, ranking from the 106th place in 1996 to the 64th in 2003. The company has exported complete plants and equipment to over 60 countries and regions involving projects in such diverse fields as energy, electrical engineering, heavy duty mining equipment, general machinery, light industry, textile industry, building materials, traffic and transportation, communication, broadcast and television etc. CMEC has grown and developed into a comprehensive enterprise group having a diversified portfolio spanning into property ownerships, foreign trade, engineering industry, and technology services. CMEC has undertaken 64 power related projects (including hydro and thermal power) involving a total of over 20,000 MW, in multiple regions around the globe since the early 1980s. Key projects undertaken include: 1983 Guddu Thermal Power Station Unit No.4 (210MW, Oil-Fired) 1987 Jamshoro Thermal Power Station Unit No.2 & No.3 (210MW, Oil/Gas-Fired) 1987 Jamshoro Thermal Power Station Unit No.4 (210MW, Oil/Gas-Fired) 1991 Muzzaffargarh Thermal Power Station Unit No.5 & No.6 (210 MW, Oil/Gas-Fired) 1993 Muzzaffargarh Thermal Power Station Unit No.4 (320 MW, Oil/Gas-Fired) 2000 Salah-Aldeen 4300MW (Oil/Gas Fired) Units (Iraq) 2001 Kuching Thermal Power Station Unit No.3 & No.4, Phase II (255MW, Coal-Fired) 80

2. Key projects

2002

3. Contact details

Gas Turbine Power Plant (335MW) at Omotoscho, Ondo State (Nigeria) 2002 3150MVA 132/330KV Power Substation at Omotosho, Ondo State (Nigeria) 2002 Tamil Nadu 2200KW Hydropower Equipment (India) 2003 AL-Hiswa 160MW Thermal Power Station Extension Project (Turbin Island) (Yemen) 2003 Labuhan Angin 2115MW Coal-Fired Power Station Project (CFB Boiler) (Indonesia) 2004 Garri 4#250MW Sponge Coke Plant Project (Sudan) 2004 Power Plant (1135MW) (CFB Boiler), Silopi (Turkey) 2004 600KM. Roseries-Khartoum Third Transmission Line Project (Sudan) 2004 Vedanta 330MW Co-Generation Power Plant Construction Project (India) 2004 Priyadarshani Jurala Hydro Electric Project (639MW) (India) 2004 300KW Hydropower Plant (Pakistan) 2005 Vikram Cement 223MW Thermal Power Plant Project (India) 2005 Cujarat Cement Works 423MW Thermal Power Plant Project (India) 2006 Ban Coc. Hydropower Equipment (36MW) (Vietnam) 2009 Imboulou 430MW Hydropower Station (Congo) Corporate Head Office: CMEC Building, No.178 Guanganmenwai Street, Xuanwu District, Beijing 100055, China Tel: (86-10) 63474525, 63479268 Fax: (86-10) 63268192 Corporate website: www.cmec.com

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7.3

Contractor and Consultant Profiles

7.3.1 Korea Plant Service and Engineering Co Ltd KPS is the potential O&M Contractor with whom GPL is currently in negotiation with. A brief profile is provided below. For further details reference may be drawn to KPS website (www.kps.co.kr) 1. Business profile KPS is a Korean company specializing in operations and maintenance of electrical facilities. It has successfully executed a number of projects in more than 20 countries for over thirty years. KPS has over 4000 well trained professionals and maintenance experts Primary business areas include: Power Plant Maintenance Service Transmission and Substation Maintenance Service Operations and Maintenance Gas Turbine Component and Rotor Repair Service Industrial Facilities Maintenance Service Overseas Power Projects O&M Projects KPS has undertaken several O&M projects in the region with eight major projects in Pakistan, India, Indonesia and Malaysia: Maintenance & Overhauling Projects KPS has carried out 17 major maintenance and overhauling projects in Australia, Philippines, Lebanon, Indonesia, South Africa, Pakistan, Nigeria, Sudan, Vietnam, and Thailand. Commissioning Services and Technical Consultancy Projects KPS has completed nine commissioning services and technical consultancy projects in India, Brazil, Taiwan, USA, UAE, Vietnam, Indonesia, Pakistan and Saudi Arabia. Nuclear Power Projects KPS has undertaken twelve nuclear power projects in Brazil, USA, China, Belgium and Japan. Domestic Power Projects (within Korea) KPS has a track record of involvement in over 65,000 MW of combined cycle, thermal, nuclear, hydroelectric, and diesel power projects across Korea. It has provided the whole ambit of operations and maintenance

2. Key projects

82

services - including routine maintenance, overhauling, emergency restoration, and others operational services - to an impressive list of clients in the power sector, some of which are: Combined Cycle Plants Korea Western Power Company (KOWPO) Korea Southern Power Company (KOSPO) Korea Midland Power Company (KOMIPO) Korea South-East Power Company (KOSEP) Korea East-West Power Company (KEWP) LG Power Thermal Power Plants Korea Midland Power Company (KOMIPO) Korea South-East Power Company (KOSEP) Korea East-West Power Company (KEWP) Korea Western Power Company (KOWPO) Korea Southern Power Company (KOSPO) Nuclear and Hydro Power Plant Korea Hydro & Nuclear Power Company (KHNP) Korea Southern Power Company (KOSPO) Korea Western Power Company (KOWPO) Korea South-East Power Company (KOSEP) Korea East-West Power Company (KEWP) Korea Midland Power Company (KOMIPO) Diesel Power Plants Korea Midland Power Company (KOMIPO) Korea South-East Power Company (KOSEP) IPP O&M Services Pohang Iron & Steel Company (POSCO) GS Power (GS Group of Company) GS EPS (GS Group of Companies ECO Korea SK Energy Hyundai Heavy Industries (HHI) Transmission and Substation Services Korea Electric Power Corporation (KEPCO)

83

3. Contact details

Corporate Head Office: Migeum Road 1 (Geumgok-dong) Bundang-gu, Seongnam-si, Gyeonggi-do, 463-726, Korea Tel: +82 31 710 4480 9 Fax: +82 31 710 4499 Corporate Website: http://www.kps.co.kr Total Asset Base: Total Liabilities: Total Shareholders Equity: Net Asset Value: Sales: Profit before taxes:

4. Financials (as of 2007)

(USD 529.76 M) (USD 132.06 M) (USD 397.70 M) (USD 230.74 M) (USD 726.28 M) (USD 93.00 M)

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7.3.2 Scott Wilson GPL is in negotiations with Scott Wilson for the provision of project and construction management services, to ensure that the EPC services are effectively carried out and efficiently concluded. A brief company profile is provided below, for further details reference may be drawn to Scott Wilsons website (www.scottwilson.com) 1. Business profile Scott Wilson Group plc is a global integrated design and engineering consultancy for the built and natural environments. Headquartered in the UK, the group has a worldwide network of 80 offices with over 6000 employees. Scott Wilson offers strategic consultancy and multi-disciplinary professional services in the power, railways, buildings, infrastructure, environment and natural resources sectors. Key operational regions include the Asian-Pacific rim, UK, Continental Europe, Pakistan, India and the Middle East, with offices located in London, Hong Kong, Warsaw, New Delhi, Bahrain and Dubai. Scott Wilson has a track record of involvement in over 100,000 MW of thermal, hydroelectric, nuclear and renewable energy projects.

2. Key projects

Scott Wilson has undertaken a number of power related projects (including hydro and thermal power) in multiple regions around the globe. Key relevant projects undertaken include: Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Pakistan Ongoing Ongoing Pakistan Ongoing Ongoing Kuwait Ongoing Ongoing 2008 2005 2005 2005 Saif Power CCGT (225MW), Pakistan Engro Qadirpur (200MW), Pakistan Fujairah IWPP (2000MW,130MIGD), UAE Ras Laffan C IWPP (2370MW,63MIGD), Qatar Green Power CCGT (2200MW), Pakistan HUBCO Narowal RFO based Diesel CCPP Heron CCGT Power Plant (435MW), Greece Techno Power Faisalabad Diesel Power Plant Engro CCPP Power Plant (200MW), Pakistan Shuaiba South Emergency Power Station

(225MW),

(150MW),

(400MW),

Papalanto Power Project (335MW), Nigeria Taweelah B IWPP (2000MW), UAE Oqyana Off-shore Diesel Power Plant (100MW), Dubai Kemerton Power Plant (300MW), Australia Laverton Power Plant (300MW), Australia Kogan Creek Power Plant HAZOP Study (800MW),Australia 85

2004 2004 2004 2003 2002 2002 2002 2002 2002 2002 2001 2001 2001 2001 2001 2000 2000 2000 2000 2000 2000

Cartagena CCGT Plant (1200MW), Spain Cikarang Private Plant (350MW), Indonesia Ottana Cogeneration Plant (180MW), Sardinia Power and Desalination Plant (20MW), UAE Gas Turbine Air Inlet Cooling (180MW), Turkey San Severo CCGT Project (400MW), Italy Portogruaro CCGT Project (400MW), Italy Phu My 3 CCGT HAZID Study (716MW), Vietnam Baglan Power Station Single Shaft CCGT (500MW) and CHP Plant (25MW), UK Az Zour South GT Power Station (1000MW), Kuwait Paper Mill Cogeneration Plant Relocation (10MW), UK Skogn CHP/CCGT Power Plant (800MW) CCGT Plant Alagoas (140MW), Brazil CCGT Air Cooled Condenser Extension (180MW), Turkey Croydon Energy OCGT (50MW), UK Enfield Energy Center Single Shaft CCGT (400MW), UK Seabank Power CCGT Modules 1 and 2 (1155MW), UK CHP Plant (180MW), Turkey Langage CCGT Plant (800MW),UK San Lorenzo CCGT HAZOP Study (500MW), Philippines Huntstown CCGT HAZOP Study (342MW), Republic of Ireland

3. Contact details

Corporate Head Office: Scott Wilson Group plc 6-8 Greencoat Place, London, Postal Code SW1P1PL, UK Tel: +44 (0)20 7798 5000 Fax: +44 (0)20 7798 5001 Corporate website: www.scottwilson.com

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7.3.3 AbacusConsulting AbacusConsulting (Abacus) is the firm of management consultants recently engaged by GPL as Financial Advisors on the Project, replacing another firm hired previously. A brief corporate profile is provided hereunder, for further details reference may be drawn to AbacusConsultings website (www.abacus-global.com) 1. Business profile Abacus was established in 1987 in Pakistan, and is today a leading provider of management consulting services in the region. Abacus has been offering cutting-edge business solutions helping organizations to transform their visions into realities through a combination of latest business methodologies and technological tools. The business value offered by the Company has a deep scale, is industry focused and technology driven with a world class delivery capability. Abacus is the largest firm of management consultants in Pakistan, and one of the largest in Southeast Asia. The company has a staff strength of more than 2000, and a large dependable resource pool of on-call consulting staff available on need basis. Their major strength, therefore, is the ability to provide clients with specialist consultants having sound knowledge and wide practical experience in the required fields. The company has affiliations and strategic alliances with leading global brands and service providers. As global partners, Abacus was PricewaterhouseCoopers (PwC) Consulting up until 2003 when PwC was restructured internationally and its consulting arm divested in compliance with the Sarbanes-Oxley Act. The four core business verticals, namely Corporate Finance and Strategy Consulting, Business Transformation Solutions, Information Technology Solutions and Human Capital Solutions have been designed to address both industry-specific and business process needs of clients. Abacus has provided strategic and financial advisory to a number of projects in the energy sector, a few of the relevant ones are provided below: Restructuring and privatization of Karachi Electric Supply Company for the ADB and GoP Restructuring and Privatization of Jamshoro Power Company Ltd for the ADB and GoP Restructuring of Gas Sector for ADB Privatization of Sui Northern Gas Pipelines Ltd. for the GoP and ADB Privatization of Sui Southern Gas Corporation for the GoP and ADB 87

2. Key projects

Buy-side advisory and valuation for the privatization of LPG businesses of SNGPL, SSGC and PSO, for Petrosin Products Pakistan Buy-Side and Financial Advisory on S K Hydro Power Project, for Kuwait Privatization Projects Holding Company Several Due Diligence exercises for the acquisition of local LPG marketing companies for SHV Energy NV Feasibility Study for LPG Storage Terminal for SHV Energy NV Due Diligence for a merger between Premier and Shell Pakistan Economic Feasibility for a 116 00MW power generation project, Powergen Corporation Ltd. Prefeasibility study for Multan Power, a 118 MW power generation project, for EuroKapital, Germany Corporate Advice on USAID-WAPDA Power Distribution Program, Ebasco. Aepes. Iteco-Joint Venture Buy-Side and financial advisory for privatized LPG business of PSO, for SHV Energy Pakistan Investment Advice and Sectoral study for Gulf Pak Refinery 3. Contact details Corporate Head Office: Abacus House, 4 Noon Avenue, Main Canal, Lahore 54600, Pakistan UAN: +92 111-ABACUS Tel: +92 42 3588 4981 to 85 Fax: +92 (42) 3588 4987 Corporate website: www.abacus-global.com

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7.3.4 Haidermota & Co. GPL is in the process of finalizing commercial terms with Haidermota & Co., the law firm to be engaged by GPL as Legal Council to oversee the legal and contractual issues related to the Project. For further details reference may be drawn to Haidermota & Cos website (www.hmco.com.pk) 1. Business profile Haidermota & Co. was established in 1959 in Pakistan, by its senior partner, Mr. A.M. Haidermota. The Firms legal expertise is widely recognized, evidenced by the wide range of domestic and international clientele the firm represents as well as affiliations with law firms worldwide. Haidermota & Co. has wide experience in commercial, corporate and financial matters. Its principal areas of expertise are privatizations, securitizations, mergers and acquisitions, and project financing. Projects undertaken have been in the corporate, power, oil and gas, foreign investment, and real estate sectors. It is a specialist litigator, having expertise in statute drafting, policy advice and regulation. Haidermota & Co. has undertaken several power and energy related projects (including hydro and thermal power) in multiple regions around Pakistan since the first power sector policy in 1994. Key relevant projects that the company has been involved in since then, include: Orient Power (Net 212.7 MW) Sapphire Power (Net 209 MW) Foundation Power Company Limited (Net 171.483) Attock Gen Limited (Net 156 MW) Halmore Power (225 MW) Kapco (Expansion 450 MW) Liberty Power Tech Limited (Net 194.65 MW) Atlas Power Limited (Net 213.6 MW) Kohinoor Energy Limited (Expansion Net 143 MW) Star Power (133 MW) Altern Energy Limited (Expansion 29 MW) Habibullah Coastal Power DHA Cogen Limited Pak-Arab Pipeline Company Ltd HUBCO 3. Contact Details Corporate Head Office Haidermota & Co. Barristers at Law & Corporate Counselors D-79, Block 5, Clifton, K.D.A. Scheme No.5 Karachi-75600. 89

2. Key projects

Tel: +92 (21) 111 520 000 +92 (21) 3587 9097 +92 (21) 3587 9373 Fax: +92 21 3586 2329 Corporate Website: http://www.hmco.com.pk

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8 FINANCIALS
8.1 Overview

Financial projections have been prepared based on the information provided by the Management of Grange Power Ltd and the NEPRA Tariff Determination of December 30, 2009. The costs, rates, indexation and other assumptions approved by NEPRA have been used to make the 25-year projections, the term duration allowed by NEPRA for GPL based on the expected life of the Project. The operational and financial assumptions in the projections also reflect the judgment of GPL Management as well as NEPRA standards derived from their experience of other similar generation projects in the sector. These assumptions have been compiled into a financial model, based on a standard template generally used by the power sector in Pakistan. The financial projections are based on assumptions and hypotheses regarding future events; actual results will vary from the information herein presented and the variations may be significant. Accordingly, GPL or the Advisors express no opinion as to whether these projections will be achieved. Prospective bidders must adopt their own opinion as to the assumptions underlying the projections, and the reasonableness of the projections. The projections reflect a base case scenario covering the expected life of the Project and hence the term of the PPA of 25 years, planned to be from 2012 to 2037. Key assumptions underlying the model are discussed below:

8.2

Tariff Determination

As mentioned above, the projections have been prepared on the basis of the revised NEPRA Tariff Determination for GPL dated December 31, 2009. The tariff structure and its basis have been explained in detail in section 6.8, however a summary is provided here for convenience. According to the Tariff Determination, the Capacity Purchase Price has two components: the escalable component (which is index linked to inflation and exchange rate parity) and a non-escalable component. Both of these are subject to a one-off adjustment to reflect the difference between the dependable capacity initially set by NEPRA and the actual capacity to be determined at COD. The Energy Purchase Price for GPL also has two components: the fuel component and the variable O&M component. Again, to reflect the difference between the default heat rates initially used by NEPRA and the actual heat rates, the fuel component is subject to a one-off adjustment at COD.

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8.3

Technical and Operational Assumptions

The assumptions for projected capital and its expenditure plan, fuel costs, operating and maintenance costs and indexation assumptions for GPL are detailed below: 8.3.1 Project Cost The total Project cost of USD 218.20 million is constituted of two main components: EPC costs (about 75 percent); and miscellaneous costs: a) Total EPC costs of USD 164.35 million include the cost of plant and machinery estimated at USD 122.38 million; and other engineering, procurement and construction costs of USD 41.97 million. EPC costs are further divisible into two parts: the content that has an offshore origin which forms almost 83 percent of the total EPC cost; and the remaining portion which is planned to be sourced locally. b) Miscellaneous costs of USD 53.85 million include all other incidental project costs such as administrative expenses, insurance, utilities during construction, duties and taxes, service fees etc.

Project costs can be recapitulated as follows: Table 8.1: Project Costs Cost Component 1a 1b Plant and machinery Other EPC costs Total EPC Cost Off-shore EPC component Onshore EPC component Miscellaneous costs Total Project Cost Cost (USD Million) 122.38 41.97 164.35 136.35 28 53.85 218.20 Percent of Total Project Cost 56.09 19.23 75.32 62.49 12.83 24.68 100.00

8.3.2 Capital Structure The total project cost is estimated at USD 218.2 million, of which 25 percent or about USD 54.55 million is planned as equity and the remaining USD 163.65 million shall be arranged as long term loan.

8.3.3 Capital Expenditure Plan The capital expenditure plan for setting up of GPL including all EPC and other costs up to COD is incorporated in the financial model as follows:

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Table 8.2: Capital Expenditure PKR Million Year ended June 30 Net Investment in Project 2009 5.083 2010 77.414 2011 110.195 2012 25.503 Total 218.195

8.3.4 Project Financing The entire 75 percent debt portion of capital i.e. USD 163.65 million is assumed in the model to be arranged as long-term debt, based on the following terms: a) Tenure and Grace Period: A grace period of 3 years is assumed for the loan, after which it is to be repaid in 40 quarterly installments, over 10 years. b) Interest Rate: An annual interest rate of 16.23% is assumed for the loan based on 3month KIBOR (13.23%) plus a spread of 3%. c) Repayment Start: Repayment of the loan shall begin during the first year of operations. d) Debt Service Reserve Account (DSRA): A DSRA has been assumed in the first year of operations (before the end of the grace period), equivalent to an amount of one interest and one principal payment i.e. three months of interest and the first quarterly principal installment. This account shall be maintained for the period of the tenure of the loan.

8.3.5 Operation and Maintenance Costs: There are two types of O&M costs: fixed O&M costs and variable O&M costs. GPLs Management estimates these costs as follows: Table 8.3: Operation and Maintenance Costs O&M Components
Gross Fixed O&M Foreign Gross Fixed O&M- Local Net Fixed O&M Variable O&M

Total per annum

USD 1.78 million PKR 107.82 million

USD * per unit

1.0125/ kW/ month 0.7623/ kW/ month 1.7749/ kW/ month 0.0058/ kWh

PKR* per unit

81.46/ kW/ month 61.33/ kW/ month 142.79/ kW/ month 0.47/ kWh

USD 6.36 million

Conversion based on the reference exchange rate of PKR 80.45 per USD.

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The O&M costs are based on the estimated dependable capacity (i.e. minimum net capacity) at delivery point under mean site conditions, of 146.5 MW. The Initial Dependable Capacity (IDC) tests shall be carried out for determination of contracted capacity at the time of COD. Variable O&M costs also take into account the availability factor assumed at 85 percent. 8.3.6 Projected Generation The table below shows generation estimates for the plant. The gross generation estimate after maintenance shutdowns, i.e. 727 GWh, has been used in the calculation of fuel cost. Table 8.4: Generation Estimates Name plate capacity at ISO conditions Derating factor based on mean site conditions Gross capacity at site Number of hours per year Capacity/ plant factor Gross annual generation before maintenance shutdown Lost production during annual maintenance shutdown Gross annual generation after maintenance shutdowns Auxiliary consumption Net billed electricity 163.353 MW 6.95% 152 MW 8,760 hours 60% 799 GWh/ annum 72 GWh/ annum 727 GWh/ annum 26 GWh/ annum 701 GWh/ annum

8.3.7 Fuel Consumption Rate Although GPL is a dual-fuel power plant, the primary fuel expected to be used in generation is Residual Fuel Oil which has, therefore, been used for the financial projections. The two key factors required to estimate the fuel consumption rate are Heat Rate of the plant and the heating value of the fuel, as shown in the table below. The Heat Rates used are the default rates assumed by NEPRA, which shall be adjusted at the time of COD. Whereas the standard heating value of LHV RFO is used. Table 8.5: Fuel Consumption Rate for RFO Estimation Heat Rate required for 1 kWh at 100% efficiency Average plant efficiency (with RFO) Heat Rate before degradation Degradation factor Net Heat Rate Heating value (LHV RFO) Fuel consumption rate Note: Btu: British thermal unit

3,413 Btu/ kWh 45.014% 7582 Btu/ kWh 0% 7,582 Btu/ kWh 38,555 Btu/ kg 0.1967 kg/ kWh

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8.3.8 Fuel Cost Projected fuel consumption is a function of the projected generation, the heat rates, the fuel consumed, and the energy content of the fuel, all of which have been discussed above. The unit fuel cost is then factored in to derive the total cost of fuel. The fuel cost is effectively a pass through item. The reference price used in the model as cost of RFO is PKR 27,777 per kg. Cost estimates for GPL, based on the assumptions discussed above, are provided in the following table: Table 8.6: Fuel Cost Estimates Total per annum USD 47.59 million USD per unit* 0.0679/ kWh PKR per unit 5.46/ kWh

Fuel Cost *

Conversion based on the reference exchange rate of PKR 80.45 per USD.

8.3.9 Insurance Assumptions for insurance taken in the model are provided in the table below. Insurance cover shall become effective date after COD. Accordingly, total sum insured amounts to USD 400 million, with an annual insurance premium of USD 2.22 million which is 1.35 percent of the total EPC cost as per the ceiling set by NEPRA. 8.3.10 Taxation No income tax has been assumed in the model as GPL shall not be subject to taxation on its profits during the term of the PPA. If GPC is obligated to pay any tax on the income purely generated from its operations, the exact amount shall be reimbursed by the Power Purchaser. Most taxes, therefore, are pass-through items. Withholding tax rate assumed for the model is generally 6 percent, except for the tax on dividends which is 7.5 percent. 8.3.11 Customs Duties According to the IA to be signed shortly with the Government of Pakistan, GPL shall be entitled to import plant and machinery for the Project, prior to COD, without restriction and is exempt from sales tax but subject to payment of applicable customs duty not to exceed five percent on value. A recent levy of an additional 1.25 percent by the Government of Sindh on imports adds to this cost. The model, therefore, assumes a total of 6.25 percent of value as import taxes.

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8.3.12 PPA Letter of Credit According to the PPA an unconditional, irrevocable, divisible and transferable on demand bank guarantee in favour of the power purchaser is required to be delivered by GPL to the CPPA/NTDC. This is referred to as the Company Letter of Credit. The rate approved by NEPRA, and used in the model, for this Company LC is USD 27.5 per kW of the Contract Capacity. The LC is required to remain effective until 15 days after the COD, and in the model it is assumed for a period of 2.5 years, with credit commission charges of 1.5 percent.

8.3.13 Indexation The tariff determined by NEPRA effectively allows any significant fluctuation in input prices and/or exchange rate variations effecting the Projects fixed or variable costs, as pass through. So for all practical purposes, GPL shall be compensated for variations on the cost side through its tariff. The financial model is therefore developed on a constant cost basis, with all outcomes assumed as real. The following table summarizes the indexation allowed by NEPRA in GPLs tariff determination: Table 8.7: Indexation Assumptions Indices Reference Pak CPI/ inflation Reference US CPI/ inflation Reference Exchange Rate USD/ PKR Reference Exchange Rate EUR/ PKR 3-month KIBOR rate 6-month KIBOR rate Premium/ spread KIBOR funding for working capital Rates 5% 2.5375% per annum 80.45 110.00 13.23% per annum 13.93% per annum 3% 3-month KIBOR

8.4

Financial Analysis

The operating results from the financial model have been provided in Appendix B: Financial Model, of this Information Memorandum. A summary of key findings is as follows: The Project reflects an internal rate of return (IRR) of 16.24 percent, in real terms. This becomes more attractive in view of the assured 25-year tariff and sale of capacity and generation output. Debt-to-Equity ratio is a maximum of 64% : 36% at the end of the first year of operations, tapering down to 0% : 100% in the 9th year - towards the end of the ten year repayment term. In terms of ability to meet financing obligations, the Debt Service Coverage Ratio (DSCR) remains at a constant of 1.34 over the debt servicing period. 96

Earnings provide sufficient coverage for making interest payments, as demonstrated by the Times Interest Earned (TIE) which does not drop below 1.3 at any time throughout the 25 years, with an average of 2.02. During the first ten years, over the tenure of the loan, the average remains at 2.57. In terms of return on equity, the tariff is built to allow GPL a ROE of 15 percent. The various measures used in the financial model reflect these returns as: Dividend IRR of 14.88 percent, Equity IRR of 14.53 percent and an Actual ROE of 16.61 percent. The cumulative closing cash balances, after dividend payout and debt-servicing, remains a healthy positive throughout the 25-year period.

The table below briefly highlights the financial results for GPL from different perspectives and under different scenarios: Table 8.8: Financial Analysis- Project Base Case Financial Indicators Project Results (Base Case) IRR NPV at 15% (USD) NPV at 13% (USD) ROE (approx.) Payback (based on Cumulative Net Cashflow) Payback (based on Cumulative Discounted Net Cashflow) Debt Service Coverage during loan period Average Times Interest Earned Average Times Interest Earned (EBITDA) Average Net Margin Equity Results (as per NEPRA) IRR NPV at 15% (USD) NPV at 13% (USD) 16.24% 6,782,687 21,303,067 15% th 6 Year 12th Year 1.34 2.02 5.43 7.81%

15.07% 187,067 5,663,151

The full set of financial statements produced by the model showing the profit and loss, cashflow and balance sheet positions for the company, for the 25-year project life, are attached in Appendix B: Financial Model.

97

9 RISK MITIGATION
Outlined below is an overview of potential risks that an investor may consider before making an investment decision, along with suggestions on available mitigation measures: Risk 9.1 Cost overruns Level Low Mitigations The major project costs including plant and machinery and other EPC costs shall essentially be based on fixed contracts, so overruns, if any, may not have a significant impact on the project cost. That being said, the cost estimates for the project have been calculated carefully and on the basis of actual expected costs discussed with contractors, with built in contingencies. Parameters used in cost estimations are reasonably standardized in the power sector. Under the PPA to be signed with NTDC, and the tariff determined by NEPRA, any fluctuation in the price of the fuel shall be passed on to the Power Purchaser, with no net effect on GPLs profits. GPL is in negotiation with PSO, the largest oil marketing local company with extensive infrastructure and capacity, for a long-term [13-year] Fuel Supply Agreement that would reasonably ensure availability of required levels of fuel at all times.

GPL may experience cost overruns and may need additional capital to meet its needs

9.2 Fuel availability

price

and Low

A power plant is a fuel intensive project. Variation in the fuel price or availability can affect the profitability of the project, considerably

9.3

Demand and off-take

Low

The demand for electric power may decline and the generated units may not be sold. This can be a big risk for a capital intensive project of the size of GPL.

GPL shall be signing a 25-year Power Purchase Agreement with NTDC under which NTDC shall have access to and pay for the full Contract Capacity (i.e. the declared available capacity expected to be about 145.5 MW), for the entire agreement term. This payment shall be made irrespective of generation or sales volume. The Power Purchaser shall also be obliged to purchase the net dispatched and delivered electrical output during the period based on its planned schedule of demand. Given the overall supply deficit situation, high demand location of GPL plant and its relatively competitive tariff rates based on RFO rather than HSD, the sale of generated units does not appear to be a problem.

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Risk 9.4 Default of NTDC

Level Low

Mitigations GPL shall be signing a 25-year Implementation Agreement with the Government of Pakistan that guarantees irrevocably and unconditionally, all payment obligations of the Power Purchaser to GPL.

The Power Purchaser may default on payments against Contracted Capacity or sold electric output. 9.5 Slipping timelines Low/ Medium PPIB has set specific timelines for Fast Track projects to achieve COD. There is a risk of unforeseen delays due to political factors; as well as on the Contractors side resulting in delays in the installation of the plant.

GPL expects to achieve COD by August 2012 which is in line with the stipulated deadlines. GPL is at the final stage of negotiations for a turn-key EPC contract with CMEC (and subsidiary CERIECO), who are well-renowned and experienced service providers, with extensive technical expertise in implementing similar projects in the region. A further project and construction management contract is being negotiated with Scott Wilson, another world renowned expert in the field, for a smooth and efficient implementation. These arrangements are being made to ensure an early rather than a delayed COD. Furthermore, the Contractors have guaranteed the COD, and if delayed they are obliged to pay a penalty which may be adjusted against any government penalties. In addition, we expect the PPIB timeframe to be extended further. It has been revised before by PPIB and is likely to be revised again especially if the reasons are attributable to factors out of the investors control. Furthermore, we understand that the allocated capacity for Fast Track projects has still not been consumed and there are new potential entrants on the scene. Given the dire demand-supply deficit, we do not foresee the government declining such interest.

9.6 Change in assumptions Low for projections The financial projections for the Company are based on various assumptions, which are subject to change with industrial, market, economic and political dynamics.

Power sector is one of the more regulated sectors of Pakistan with standard parameters available for estimation purposes. Confidence may further be drawn from the fact that most of the key estimates are either based on NEPRAs calculations or approved by NEPRA in their tariff determination. Furthermore, GPL has used conservative assumptions in the model which allows room for negative dynamics.

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Risk 9.7 Exchange rate risk

Level Low

Mitigations Capital and operational costs involving foreign currency exposure have been indexed for exchange rate fluctuation through a mechanism which seeks to provide GPL with a measure of protection against foreign exchange movements.

Foreign exchange exposure may impact cost of plant and machinery as well as operational profitability 9.8 Performance risk Low

The Company can be liable to losses under the performance guarantee/ Company LC under the PPA

GPL plans to procure state of the art plant and machinery, selected from the top global manufacturers, to be installed by the leading EPC Contractors, CMEC. GPL would have KPS, the leading Korean firm with extensive O&M experience in similar plants, as their O&M Contractors. It is unlikely that GPL shall not be able to deliver at the minimum performance level. The Regulators seem to be keenly approving and facilitating power projects on fast track, in order to minimize the electricity supply-demand gap. It seems unlikely that any discouraging regulations shall be placed on the sector, in the near future The founder Sponsors are making sure that the top contractors, engineers, operators, consultants and project managers are brought on for the Project. These leading experts shall be responsible for establishing as well as running the project profitably. Albario Engineering (Pvt.) Ltd, an Initial Shareholder, is also a leading engineering company who is an awardwinning preferred GE representative in Pakistan.

9.9

Regulatory risk

Low

NEPRA may introduce stringent rules and regulations to control the sector 9.10 Sponsors new to power Low sector The founder Sponsors/ Initial Shareholders of the Project are relatively new entrants into the power sector, and therefore not very familiar with the business

9.11

Inflationary pressures

Low

The Project shall be exposed to inflation both within and outside Pakistan. 9.12 Interest rate fluctuation Medium

Fixed and variable operational costs have been indexed for inflation, to WPI for local content and to US CPI for foreign component, to be adjusted on a quarterly basis. This allows the expenses to be effectively hedged against inflationary pressures. GPL has assumed a healthy debt-service coverage ratio of 1.34 times, throughout the loan tenure. This coverage is considered sufficient to tackle any expected adverse interest rate movements.

The Project is based on 75% debt which makes it sensitive to adverse movements in interest rates.

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Risk 9.13 Recession

Level Low

Mitigations Electricity has a largely inelastic demand and in the current deficit scenario, a recession is not likely to significantly impact sales or profitability. Additionally, as mentioned above, the 25-year PPA shall entail full capacity payment over the term with dispatch priority expected for GPLs generation output.

The economic downturn and recessionary pressures can result in diluting profits

9.14

Force majeure

Low/ Medium

The Project shall be exposed to force majeure and events out of GPLs control such as natural disasters, political upheavals, security disturbances etc.

Whereas Force Majeure is a risk that all businesses are exposed to, GPL has taken measures against most of these events through insurance. An extensive insurance cover against business interruptions, third party liabilities, sabotage and terrorism, employee liability and other risks has been taken, with a total sum assured of USD 400 million. Other such events are also hedged through government guarantees

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APPENDIX A: DETAILED TARIFF SCHEDULE

102

APPENDIX B: FINANCIAL MODEL GRANGE POWER LTD : PROJECTED BALANCE SHEET

(USD Million) Financial Year Ended June 30 Fixed Assets Capital Work-in-Progress Operating Assets Total Current Assets Inventory & Stores, Spares and Tools Advance to O&M Operator Accounts Receivables Debt Service Reserve Account Cash and Bank Balances Total Total Assets Current Liabilities Current Portion of Long Term Liabilities Short Term Finances (Working Capital) Accounts Payables Creditors and Other Liabilities Provision for Taxation Dividend Payable Total Long Term Liabilities Total Liabilities Share Capital & Reserves Issued, Subscribed and Paid-up Capital Reserves & Unappropriated Capital Total Total Equity and Liabilities 0 2012 1 2013 2 2014 3 2015 4 2016 5 2017 6 2018 7 2019 8 2020 9 2021 10 2022

217 217 1 1 218

209 209 7 4 8 1 21 230

200 200 7 4 8 1 21 221

192 192 7 4 8 1 21 213

183 183 7 4 8 1 21 204

174 174 7 4 8 1 21 195

166 166 7 4 8 1 21 186

157 157 7 4 8 1 21 178

148 148 7 4 8 1 21 169

140 140 7 4 8 1 21 160

131 131 7 4 8 0 21 151

7 7 156 164

8 11 19 148 167

10 11 21 138 159

12 11 22 126 149

14 11 24 113 137

16 11 27 97 124

19 11 30 78 108

22 11 33 56 89

26 11 37 30 67

30 11 41 0 41

11 11 0 11

55 55 218

55 8 63 230

55 8 63 221

55 9 64 213

55 12 67 204

55 17 72 195

55 24 79 186

55 34 89 178

55 48 102 169

55 65 119 160

55 86 141 151

103

GRANGE POWER LTD : PROJECTED BALANCE SHEET

(USD Million) Financial Year Ended June 30 Fixed Assets Capital Work-in-Progress Operating Assets Total Current Assets Inventory & Stores, Spares and Tools Advance to O&M Operator Accounts Receivables Debt Service Reserve Account Cash and Bank Balances Total Total Assets Current Liabilities Current Portion of Long Term Liabilities Short Term Finances (Working Capital) Accounts Payables Creditors and Other Liabilities Provision for Taxation Dividend Payable Total Long Term Liabilities Total Liabilities Share Capital & Reserves Issued, Subscribed and Paid-up Capital Reserves & Unappropriated Capital Total Total Equity and Liabilities 11 2023 12 2024 13 2025 14 2026 15 2027 16 2028 17 2029 18 2030 19 2031 20 2032 21 2033 22 2034 23 2035 24 2036 25 2037

122 122 7 4 2 14 136

114 114 7 4 1 13 126

105 105 7 4 1 13 118

96 96 7 4 1 13 109

88 88 7 4 1 13 100

79 79 7 4 1 12 91

70 70 7 4 1 12 83

62 62 7 4 1 12 74

53 53 7 4 2 14 67

44 44 7 4 10 22 66

36 36 7 4 18 30 66

27 27 7 4 27 39 66

18 18 7 4 36 47 66

10 10 7 4 44 56 66 -

1 1 7 4 53 65 66

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

11 11 0 11

55 71 125 136

55 61 116 126

55 52 107 118

55 43 98 109

55 35 89 100

55 26 81 91

55 17 72 83

55 9 63 74

55 1 56 67

55 1 55 66

55 0 55 66

55 0 55 66

55 0 55 66

55 0 55 66

55 0 55 66

104

GRANGE POWER LTD : PROJECTED INCOME STATEMENT

(USD Million) Financial Year Ended June 30 Generation (GWh) Gross Billable Energy (GWh) Auxiliary Consumption (GWh) Net Billed Energy (GWh) Revenue (based on Calculated Tariff) Fixed O&M - Foreign Fixed O&M - Local Insurance ROE Accured During Construction Phase ROE Withholding Tax Loan Repayment Interest Payment on Project Loan Interest Payment on Working Capital Capacity Purchase Price Fuel Variable O&M Energy Purchase Price Total Revenue Operations & Maintenance Expenditure Fuel - Gas Variable O&M Fixed O & M Total O&M Expenditure Non-Operating Expenses Insurance Total Non-Operating Expenses EBITDA Depreciation EBIT Interest and Bank Charges Taxation Net Profit After Tax Dividends 0 2012 1 2013 727 26 701 2 1 2 1 8 1 7 26 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 28 8 2 2014 727 26 701 2 1 2 1 8 1 8 25 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 27 10 10 3 2015 727 26 701 2 1 2 1 8 1 10 23 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 25 11 10 4 2016 727 26 701 2 1 2 1 8 1 12 22 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 23 13 10 5 2017 727 26 701 2 1 2 1 8 1 14 20 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 21 15 10 6 2018 727 26 701 2 1 2 1 8 1 16 17 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 19 17 10 7 2019 727 26 701 2 1 2 1 8 1 19 15 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 16 20 10 8 2020 727 26 701 2 1 2 1 8 1 22 11 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 13 23 10 9 2021 727 26 701 2 1 2 1 8 1 26 8 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 9 27 10 10 2022 727 26 701 2 1 2 1 8 1 30 3 2 50 48 4 52 102 48 4 3 55 2 2 45 9 36 5 31 10

105

GRANGE POWER LTD : PROJECTED INCOME STATEMENT

(USD Million) Financial Year Ended June 30 Generation (GWh) Gross Billable Energy (GWh) Auxiliary Consumption (GWh) Net Billed Energy (GWh) Revenue (based on Calculated Tariff) Fixed O&M - Foreign Fixed O&M - Local Insurance ROE Accured During Construction Phase ROE Withholding Tax Loan Repayment Interest Payment on Project Loan Interest Payment on Working Capital Capacity Purchase Price Fuel Variable O&M Energy Purchase Price Total Revenue Operations & Maintenance Expenditure Fuel - Gas Variable O&M Fixed O & M Total O&M Expenditure Non-Operating Expenses Insurance Total Non-Operating Expenses EBITDA Total Depreciation EBIT Interest and Bank Charges Taxation Net Profit After Tax Dividends 11 2023 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 16 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 11 12 2024 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 10 13 2025 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 10 14 2026 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 10 15 2027 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 10 16 2028 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 10 17 2029 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 10 18 2030 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 8 19 2031 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 2 20 2032 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 2 21 2033 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 1 22 2034 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 1 23 2035 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 1 24 2036 727 26 701 2 1 2 1 8 1 2 17 48 4 52 68 48 4 3 55 2 2 11 9 3 2 1 1 25 2037 727 26 701 2 1 2 1 8 1

106

GRANGE POWER LTD : PROJECTED CASHFLOW STATEMENT

(USD Million) Financial Year Ended June 30 Cashflow from Operating Activities Profit Before Tax Adjustments for Non Cash Items Depreciation Cashflows before Working Capital Changes Add Back Financial Charges Debt Service Reserve Account Decrease/ (Increase) in Current Assets Increase/ (Decrease) in Current Liabilities Cash Generated From Operations Payments Made Commissioning & Testing Costs Income Tax Financial Charges Debt Service Reserve Account Dividends Total Net Cashflow from Operating Activities Cashflow from Investing Activities Fixed Capital Expenditure Net Cashflow from Investing Activities Cashflow from Financing Activities Equity from Sponsors Loan from the Bank Working Capital/ (Repyment) Repayment of Loan Net Cashflow from Financing Activities Net Changes in Cash & Cash Equivalents Cash & Equivalents at the Beginning of Year Cash & Equivalents at the End of Year * Pre-commissioning period upto June 30, 2012 0 2012* 1 2013 8 9 17 28 (11) 34 28 8 36 (2) 11 (7) 4 1 1 (8) (8) (0.1) 1 1 2 2014 10 9 18 27 45 27 (0) 10 36 8 3 2015 11 9 20 25 45 25 10 35 10 (10) (10) (0.1) 1 1 4 2016 13 9 21 23 45 23 10 33 12 (12) (12) (0.1) 1 1 5 2017 15 9 23 21 45 21 10 31 14 (14) (14) (0.1) 1 1 6 2018 17 9 26 19 45 19 10 29 16 (16) (16) (0.1) 1 1 7 2019 20 9 28 16 45 16 10 26 19 (19) (19) (0.1) 1 1 8 2020 23 9 32 13 45 13 10 23 22 (22) (22) (0.1) 1 1 9 2021 27 9 36 9 45 9 10 19 26 (26) (26) (0.1) 1 1 10 2022 31 9 40 5 45 5 10 15 30 (30) (30) (0.1) 1 0.5

(1) -0.7 0 (1) (217) (217) 55 164 218 -

107

GRANGE POWER LTD : PROJECTED CASHFLOW STATEMENT

(USD Million) Financial Year Ended June 30 Cashflow from Operating Activities Profit Before Tax Adjustments for Non Cash Items Depreciation Cashflows before Working Capital Changes Add Back Financial Charges Debt Service Reserve Account Decrease/ (Increase) in Current Assets Increase/ (Decrease) in Current Liabilities Cash Generated From Operations Payments Made Commissioning & Testing Costs Income Tax Financial Charges Debt Service Reserve Account Dividends Total Net Cashflow from Operating Activities Cashflow from Investing Activities Fixed Capital Expenditure Net Cashflow from Investing Activities Cashflow from Financing Activities Equity from Sponsors Loan from the Bank Working Capital/ (Repyment) Repayment of Loan Net Cashflow from Financing Activities Net Changes in Cash & Cash Equivalents Cash & Equivalents at the Beginning of Year Cash & Equivalents at the End of Year 11 2023 1 9 10 2 8 20 2 16 18 2 2 0 2 (1) 2 1 12 2024 1 9 10 2 11 2 11 13 (1) 13 2025 1 9 10 2 11 2 10 11 (0.1) (0.1) 1 1 14 2026 1 9 10 2 11 2 10 11 (0.1) (0.1) 1 1 15 2027 1 9 10 2 11 2 10 11 (0.1) (0.1) 1 1 16 2028 1 9 10 2 11 2 10 11 (0.1) (0.1) 1 1 17 2029 1 9 10 2 11 2 10 11 (0.1) (0.1) 1 1 18 2030 1 9 10 2 11 2 10 11 (0.1) (0.1) 1 1 2 1 2 19 2031 1 9 10 2 11 2 8 10 2 8 2 10 2 3 8 8 10 18 20 2032 1 9 10 2 11 2 2 3 8 9 18 27 21 2033 1 9 10 2 11 2 1 3 9 9 27 36 22 2034 1 9 10 2 11 2 1 3 9 9 36 44 23 2035 1 9 10 2 11 2 1 3 9 9 44 53 24 2036 1 9 10 2 11 2 1 3 9 25 2037 1 9 10 2 11 2

108

GRANGE POWER LTD : PROJECTED FINANCIAL RATIOS

Financial Year Ended June 30 EBITDA Margin (as percent of Sales) EBIT Margin (as percent of Sales) Net Profit Margin Debt Ratio Debt-Equity Ratio Debt Service Coverage Times Interest Earned Times Interest Earned (EBITDA) Current Ratio Cummulative Yearend Cash Balances (USD Million) Net Asset Value (USD Million) Project Results IRR NPV at 13% discount rate (USD) NPV at 15% discount rate (USD) Payback (years) Discounted Payback (years) Equity Results (NEPRA) IRR NPV at 13% discount rate (USD) NPV at 15% discount rate (USD) 0 2012* 1 2013 44% 35% 8% 64% 2.35 1.34 1.30 1.61 1.10 1.17 62.85 2 2014 44% 35% 9% 62% 2.21 1.34 1.36 1.69 1.02 1.09 62.58 3 2015 44% 35% 11% 59% 1.98 1.34 1.44 1.78 0.94 1.01 63.77 4 2016 44% 35% 12% 55% 1.69 1.34 1.54 1.92 0.86 0.93 66.67 5 2017 44% 35% 14% 50% 1.35 1.34 1.69 2.10 0.78 0.86 71.57 6 2018 44% 35% 17% 42% 0.99 1.34 1.90 2.35 0.71 0.78 78.83 7 2019 44% 35% 19% 32% 0.63 1.34 2.22 2.75 0.63 0.70 88.85 8 2020 44% 35% 23% 18% 0.30 1.34 2.77 3.44 0.57 0.63 102.10 9 2021 10 2022

44% 44% 35% 35% 26% 31% 0% 0% 0.00 0.00 1.34 1.34 3.91 7.56 4.85 9.38 0.50 1.90 0.55 0.47 119.14 140.63

16.24% 21,303,067 6,782,687 6

12

15.07% 5,663,151 187,067

109

GRANGE POWER LTD : PROJECTED FINANCIAL RATIOS

Financial Year Ended June 30 11 2023 12 2024 13 2025 14 2026 15 2027 16 2028 17 2029 18 2030 19 2031 20 2032 21 2033 22 2034 23 2035 24 2036 25 2037

EBITDA Margin (as percent of Sales) 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% 17% EBIT Margin (as percent of Sales) 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% Net Profit Margin 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% Debt Ratio 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Debt-Equity Ratio 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Debt Service Coverage N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Times Interest Earned 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 1.66 Times Interest Earned (EBITDA) 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 6.92 Current Ratio 1.29 1.18 1.17 1.17 1.16 1.15 1.15 1.14 1.28 2.03 2.78 3.59 4.39 5.19 5.99 Cummulative Yearend Cash Balances (USD Million) 2.19 1.02 0.94 0.87 0.79 0.71 0.64 0.56 2.12 10.22 18.33 26.98 35.63 44.28 52.93 Net Asset Value (USD Million) 125.35 115.52 106.78 98.05 89.31 80.57 71.83 63.09 55.99 55.44 54.88 54.87 54.86 54.85 54.84

110