As part of its expansion and consolidation strategy, JSW Energy Limited has been actively evaluating various strategic assets for acquisition. In February 2020, the company signed a share purchase agreement with GMR Energy Limited for acquiring 100 per cent shares in its subsidiary, GMR Kamalanga Energy Limited (GKEL), for an amount of Rs 53.21 billion. GKEL owns and operates a 1,050 MW (3×350 MW) thermal power plant in Dhenkanal, Kamalanga district, Odisha. The project was one of the 36 identified stressed power assets for debt resolution. It was commissioned in 2014 and ran into trouble due to coal supply issues. The transaction is expected to help the parent company GMR Infrastructure pare its debt. Post acquisition, the total installed power generation capacity of JSW Energy will increase to 5,609 MW. This will expand the company’s presence in the eastern region of India and further diversify its fuel mix and offtake arrangements.
The acquisition is in line with the company’s strategic framework of acquiring assets with low power generation costs, thus minimising the receivables risk. The plant has five years of satisfactory operational history and adequate fuel security for the entire PPA capacity owing to its fuel supply agreement (FSA) with Mahanadi Coalfields Limited (MCL) for 3.64 million tonnes per annum (mtpa) of coal. It also has offtake security, with 84 per cent capacity tied up under long-term PPAs with discoms of three state – Odisha (263 MW), Haryana (334 MW) and Bihar (283 MW). Further, the project has 170 MW of open capacity, which offers JSW a further upside potential. The open capacity requires new FSAs of 800,000-850,000 tonnes per year, of which a 0.4 mtpa FSA has already been secured in recent SHAKTI coal auctions. The asset has locked 150 MW of capacity as an L1 basket bidder in the recent pilot power procurement scheme Phase II reverse auctions.
Another positive is that the project lies in the coal-rich belt of Talcher, ensuring a low variable cost, thereby placing it favourably in merit order despatch. The average fixed cost that will be realised by the asset in 2019-20 is Rs 1.61 per unit and the average variable cost is Rs 1.50-Rs 1.60 per unit including the coal pass-through costs. Hence, the average power cost at the central transmission utility periphery will be Rs 3.10-Rs 3.20 per unit, which puts it in the bottom quartile of the purchase basket for the respective discoms. According to JSW, the power plant can be expanded by another 350 MW at a low incremental project cost.
The deal has been finalised at an enterprise value of Rs 53.21 billion. JSW expects the asset to have a base EBITDA of around Rs 9 billion with an upside potential of another Rs 1.5 billion. At the Rs 9 billion base EBITDA, the asset is valued at 5.9 times the enterprise value. The asset has an outstanding debt of Rs 39.51 billion. Of the balance debt consideration of Rs 13.7 billion, Rs 7.55 billion will be payable upfront, subject to the working capital adjustment, and Rs 6.15 billion on achieving different milestones. GKEL had reported revenues of Rs 21.95 billion in 2018-19.
The way forward
JSW Energy is also in the process of acquiring the 700 MW Ind-Barath-owned Utkal power plant through the insolvency process, which is expected to be completed by September 2020. As for the GKEL deal, analysts are positive and expect that it puts JSW on the right track to double capacity to 9 GW by 2023-24.