Entity Financial Analysis Report

Project Number: 51308-001

Loan Number: XXXX
October 2019

India: Chennai-Kanyakumari Industrial Corridor:

Power Sector Investment Project
Tamil Nadu Transmission Corporation Limited (TANTRANSCO)
A. Introduction

1. Tamil Nadu Transmission Corporation Limited (TANTRANSCO) is the state transmission

utility (STU) of Tamil Nadu and is responsible for development, maintenance and operation of
intra-state transmission network in the state. It is also the deemed state transmission licensee.
The company was incorporated in June 2009 after restructuring of erstwhile Tamil Nadu Electricity
Board (TNEB) and the first set of financial statements were prepared for FY2009–2010.

2. The company is a regulated entity and its operations and tariffs are regulated by electricity
regulatory commissions under the Electricity Act 2003. Tamil Nadu Electricity Regulatory
Commission (TNERC) decides the intra-state transmission tariffs and corresponding revenues
based on the principle of prudent cost recovery (including a regulated return of 14% on approved
equity balances). TANTRANSCO filed its first tariff petition before TNERC during FY2011–2012
for approval of intra-state transmission tariffs for FY2012–2013. Subsequently, an intra-state
transmission order was issued by TNERC on 30 March 2012.

3. The tariff-setting process is governed by TNERC (Tariff regulations). Tariffs and revenues,
once approved on ex-ante basis, are subject to truing-up in subsequent years based on actual
revenues earned and expenses incurred after a prudence check of TNERC. During the truing-up
process, TNERC may disallow an actual expense and reduce the revenue recovery in future
years, if the expense is not prudent or efficient in the view of the Commission or the expense is
not in accordance with its regulations and previous judgements/orders. Hence, the revenues
which are the critical parameter for ascertaining profitability of a company are subject to a
substantial regulatory risk and may fluctuate significantly based on TNERC’s decisions. The
company, however, is insulated from the demand risk, as any under-recovery (or over-recovery)
on account of a change in transmission demand is usually allowed in the truing-up order.

B. Tariff filings and issuance of intra-state transmission tariff orders

4. TANTRANSCO filed its first tariff petition during FY2011−2012 before TNERC for approval
of intra-state transmission tariffs for the ensuing year FY2012−2013. TNERC issued the intra-
state transmission order on 30th March 2012. This was the second intra-state transmission order
issued by TNERC, the first being the order issued by TNERC on 15 May 2006 in response to the
petition submitted by erstwhile TNEB.

5. The company then filed a tariff petition before TNERC for approval of intra-state
transmission tariffs for FY2013−2014 and subsequently the third intra-state transmission tariff
order was issued by TNERC on 20 June 2013.The company however, did not file a tariff petition
during FY2013−2014 for the approval of tariff for FY2014−2015 and the Commission initiated suo-
motu proceedings. The fourth intra-state transmission tariff order was issued in December 2014.

6. TANTRANSCO filed a truing-up/tariff petition during in January 2017, on which an order

(fifth) was issued on 11 August 2017. In the order, TNERC trued up TANTRANSCO’s aggregate
revenue requirement Report (ARR) until FY2015–2016. The Commission also approved
TANTRANSCO’s ARRs till FY2018−2019 and intra-state transmission tariff for FY2017−2018. In
this order, the Commission relied on its own computations for depreciation based on the adjusted
gross fixed assets (opening balance at the end of March 2012) without considering the impact of
revaluation of assets and average depreciation rates.

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C. Historical Financial Performance

7. TANTRANSCO’s financial performance from FY2012–2013 to FY2017–2018 is

summarized in Table 1, and detailed financial statements are provided in Annexure.

Table 1: TANTRANSCO-Summarized Financial Performance (2013-2018)

(₹Million)
Item 2013 2014 2015 2016 2017 2018
Profit and Loss Statement:
Operating Revenue 24,150 28,771 19,362 25,071 25,781 27,818
Depreciation & amortization 2,995 3,123 5,680 4,876 5,908 7,523
Other operating expenses 5,226 7,173 8,564 10,767 12,159 13,604
Operating income (EBIT) 15,928 18,474 5,119 9,427 7,714 6,691
EBITDA 18,923 21,598 10,799 14,304 13,621 14,214
Interest expenses (Gross) 13,299 7,239 9,274 13,793 13,104 15,657
Interest expenses (net of capitalised
interest) 10,582 5,000 6,360 10,598 10,302 12,171
Extra-ordinary items and other expense 0 0 0 0 7 41,750
Profit before tax (PBT) 2,365 13,080 (1,129) (2,634) (2,749) (46,661)
Net income/(loss) 2,365 13,080 (1,129) (2,634) (2,749) (46,661)
Dividend and other appropriations 0 0 0 0 0 0

Cash flow statement:

Capital expenditure 11,369 30,482 31,748 142,184 36,197 29,175
Operating cash flow 37,426 21,295 17,407 61,028 28,693 12,089
Investing cash flow (11,356) (30,461) (31,742) (158,101) (36,197) (29,172)
Loan repayments 26,019 12,863 13,099 30,248 10,510 17,517
Financing cash flow (26,109) 9,063 14,870 96,670 7,832 17,533
Net cash flow (39) (103) 535 (403) 327 450

Balance sheet:
Current assets 102,085 152,803 213,608 276,111 201,801 66,654
Non-current assets 122,082 149,419 175,480 329,864 353,483 369,264
Fixed assets (net) 87,925 98,131 126,632 267,861 289,398 307,423
Current liabilities 147,132 195,397 259,013 367,175 313,971 222,067
Long term borrowings a 82,537 93,381 107,101 99,985 132,982 161,842
Non-current liabilities 83,014 94,039 107,911 122,656 130,541 169,095
Total Equity (5,979) 12,786 22,165 116,144 110,772 44,757
Share capital 28,409 30,099 38,810 41,355 41,355 47,414
Return on net fixed assets b 14% -1% -1% -1% -16%
Debt-service coverage ratio c 0.48 1.07 0.48 0.32 0.58 0.43
Debt (LT) /
(Debt (LT)+Total equity) d 108% 88% 83% 46% 55% 78%
Current ratio e 0.69 0.78 0.82 0.75 0.64 0.30

EBIT = earnings before interest and tax; EBITDA = earnings before interest, tax, depreciation and
amortization; LT = long-term
a Includes current maturities on long-term borrowings.
b Net income/average fixed assets.
c Calculated as (EBITDA-Tax) divided by (Interest expenses+ principal repayments).
d Calculated as long-term debt divided by total equity (including reserves and surplus).
e Calculated as current assets divided by current liabilities.

Source: Tamil Nadu Transmission Corporation Limited

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8. Revenue. In FY2013−2014 the company registered the highest revenue (₹28.77 billion)
for the period although this was followed by a decline of 32.7% in the subsequent year before the
recovery started in FY2015−2016. The revenue remained largely flat for the remainder of the
period. The variation in revenue is mostly a consequence of delays on the part of TANTRANSCO
in submitting petitions for its aggregate rate of return (ARR) tariffs and true ups.

9. Profit. The company posted a substantial net profit of ₹13 billion (45.5 % of revenues)
and a net profit of ₹2.3 billion (9.8% of revenues) during FY2013−2014 and FY2012−2013
respectively. Thereafter, the company has posted losses for last 4 years. Net loss for
FY2016−2017 was ₹2.75 billion (10.66 % of revenues) with a net cash inflow of ₹0.34 billion. The
loss increased to ₹46.6 billion for FY2017−2018, however this figure includes a one-off charge of
₹41.7 billion for historical (prior period) interest claimed by TANGEDCO. The company’s
accumulated losses at the end FY2017−2018 were ₹37.7 billion (80% of contributed equity) which
included an opening accumulated loss level of ₹40.3 billion originating from the provisional
transfer scheme.

10. The reasons for financial losses posted by the company become apparent when reviewing
the approved revenue and associated disallowances in the last intra-state transmission tariff order
(August 2017). The order was issued against TANTRANSCO’s truing-up petition for
FY2011−2012 to FY2015−2016. In the order, TNERC also approved intra-state transmission
ARRs till FY2018–2019 and tariff for FY2017–2018. TNERC’s disallowances on account of return
on equity, operation & maintenance expenses and interest expenses were substantial, amounting
to around ₹8.5 billion of revenue. As noted below, TANTRANSCO has challenged TNERC on the
return on equity disallowance and the case is pending in the Supreme Court of India but at this
stage has not appealed other disallowances.

11. Revaluation reserve: The final transfer scheme with regards to reorganization of
erstwhile TNEB was notified on 13 August 2015 and consequently TANTRANSCO included a
revaluation reserve on its balance sheet with an opening balance of ₹71.63 billion during
FY2015–2016. After adjusting for amortization of depreciation towards the revaluation reserve
and a minor adjustment towards the opening balance, a balance revaluation reserve of ₹47.20
billion was carried forward at the end of the FY2015–2016. This reserve had reduced to ₹35.07
billion by the end of FY2017–2018.

12. Further, an additional current liability owed to TANGEDCO and other creditors was
created in the balance sheet to offset the revaluation of assets by ₹142 billion. Only part of this
additional current liability has been recognized by the regulator (TNERC) in setting of the
transmission tariff. As TANTRANSCO was not servicing the unrecognized portion of this liability
TANGEDCO has levied a penal interest charge of ₹41.8 billion in FY2018. The resolution of this
issue is addressed through the proposed financial restructuring plan (FRP).

13. Capital expenditure: During the last 4-year period, annual capital expenditure remained
in the range of ₹30−35 billion, except for FY2015−2016, when the assets were revalued to
account for the impact of notification of the final transfer scheme. The asset revaluation of
₹142 billion in FY2015−2016 was reflected as an increase in capital expenditure funded through
increase in current liabilities in the cash flow statement.

14. Government’s share capital: As of 31 March 2018, the company had share capital
(Government) of ₹47.4 billion and a deficit reserve (P&L deficit) of ₹37.7 billion. The company
also had a revaluation reserve (net) of ₹35.1 billion. In this context, it is important to note that
TNERC currently allows return on equity only on the share capital added since FY2011−2012 and
not on the opening balance of equity (on 31 March 2011) and the reserves created thereafter.

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TANTRANSCO has challenged TNERC on this matter and the case is pending in the Supreme
Court of India seeking additional return-on-equity (ROE) on the opening balance of equity. In its
most recent tariff order1 TNERC had recognized ₹20.17 billion as the regulatory equity at the end
of FY2015−2016.

D. Historical Financial Ratio Analysis

15. Various financial ratios were computed for TANTRANSCO based on its audited financial
statements for the period FY2012−2013 to FY2017−2018. A brief discussion on key financial
ratios is provided in the following paragraphs. The computed ratios for TANTRANSCO are
tabulated in Table 2.
Table 2: Historical Ratio Analysis-TANTRANSCO (2013-2018)
Item 2013 2014 2015 2016 2017 2018
Liquidity ratios
Current ratio a 0.69 0.78 0.82 0.75 0.64 0.30
Quick ratio b 0.36 0.35 0.32 0.27 0.01 0.02
Operating cash flow ratio c 0.25 0.11 0.07 0.17 0.09 0.05
Self-financing ratio d -0.16 0.12 0.14 -0.72
Debt management ratios
Interest coverage ratio e 1.20 2.55 0.55 0.68 0.59 0.43
Debt to asset ratio f 0.35 0.31 0.20 0.23 0.33
Debt to equity ratio g -13.80 7.30 4.83 0.86 1.20 3.62
Debt service coverage ratio h 0.48 1.07 0.48 0.32 0.58 0.43
Profitability ratios
Return on total assets i 7% 8% 2% 2% 2% -6%
Return on equity j -40% 102% -5% -2% -2% -104%
Return on fixed assets k 14% -1% -1% -1% -16%

a Current assets/current liabilities

b Cash+ liquid assets+ marketable securities/current liabilities
c Cash flows from operations/current liabilities
d Cash flow from operations/average annual capex
e EBIT/interest expenses
f LT debt/Average total assets
g LT debt/Total equity
h (EBITDA-Tax)/ (Interest expenses+ principal repayments)
i Net income+ interest expenses/Average total assets
j Net income/equity
k Net income/average fixed assets

Source: TANTRANSCO.

16. Liquidity ratios. The current ratio was maintained between 0.68 to 0.85 during this period
with lowest value of 0.30 observed during FY2017−2018. However, given that until April 2017
TANGEDCO controlled all cash flow for TANTRANSCO and TANTRANSCO’s revenues were
recognized only for accounting purposes, care should be exercised in interpreting this ratio as a
measure of TANTRANSCO’s (in) ability to manage its liquidity.

1 Determination of Intra-State Transmission Tariff and other related charges: Order in T.P. No. 2 of 2017
dated 11 August 2017.

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17. Debt management ratios. TANTRANSCO’s debt-service coverage ratio is significantly
below unity in all years except one, and it is likely that debt service coverage ratio (DSCR) should
have been lower than shown in the table had the one-off interest charge applied in FY2017−2018
to adjust for historical under recovery of interest (to TANGEDCO) been allocated to the year in
which the interest fell due.

18. The debt-equity ratio varied erratically over the period from 13.8:1 in FY2012−2013 to 89%
in FY2014−2015 to 3.6:1 in FY2017−2018 reflecting the large swings in equity arising from
accumulated profits and losses and from the asset revaluation reserve booked in FY2015−2016.

19. Profitability ratios. As mentioned before the company has made successive losses
during the last four years resulting in negative profitability ratios and no discernable patterns (other
than the obviously unacceptable performance against all the ratios calculated).

20. As indicated above, TANTRANSCO is not profitable at present mainly due to several
reasons. It is important that the genesis of the problem is looked into in details and the issues are
addressed holistically. In the following section, a time-bound FRP has been proposed to place
TANTRANSCO on the path of fiscal sustainability. Subsequent to the implementation of the FRP.
TANTRANSCO would be required to comply with the financial covenants stipulated in this regard.

E. Genesis of the financial problem in TANTRANSCO

21. As part of the unbundling of the erstwhile Tamil Nadu Electricity Board (TNEB), assets
with an estimated value of ₹43.8 billion were revalued to ₹230.3 billion and transferred to
TANTRANSCO, along with a loan amount of ₹142.2 billion and revenue revaluation reserve (net
of accumulated losses of TNEB allocated to TANTRANSCO) of ₹71.6 billion. However, for tariff
approval purposes, the Tamil Nadu Electricity Regulatory Commission (TNERC) recognized only
the asset value of ₹94.6 billion for allowance of depreciation (without recognizing the revaluation),
and loans of ₹132.1 billion for allowing interest on borrowed capital. As the loan amount exceeded
the value of assets recognized by TNERC, TNERC does not allow return on equity (ROE) on
opening equity of ₹15.1 billion in TANTRANSCO’s approved transmission tariff.2

22. The depreciation and ROE allowed in the transmission tariff provides the cash resources
to TANTRANSCO for the repayment of the principal on loans. From FY2011 to FY2018, as
against the total loan repayments of ₹146.9 billion, the total depreciation allowance was
₹42.2 billion, and ROE allowed was ₹13.4 billion, leaving a gap of ₹91.4 billion. TANTRANSCO
has been compelled to borrow additional short-term loans to bridge this gap.3 As these additional
loans are not borrowed for the purpose of creating transmission assets, they are also not
recognized by TNERC for tariff purposes, and hence TANTRANSCO has no income source from
which it can service these loans (including interest). TANTRANSCO has fallen into a debt trap,
where it is compelled to borrow increasing amounts to service debt without any revenue source
to recoup such debt service obligations.

23. The regulatory regime envisages a capital structure comprising 70% debt and 30% equity
to finance capital assets, and the tariff structure includes a ROE of 14% on the equity contribution
(capped at 30% equity contribution). Principal repayments of up to 70% are financed through the
depreciation allowance in the tariff. However, in TANTRANSCO’s case, the equity contribution
has been less than 30% of its capital expenditure, and consequently the ROE that it receives in

2 TNERC allows ROE on subsequent equity injections by GoTN.

3 Typically, the short-term loans are for 3 years and place a high burden on TANTRANSCO’s debt service
capacity.

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the tariff is also lower.4 TANTRANSCO has borrowed additional amounts beyond 70% of the
capital cost to finance its capital expenditure for which the principal repayments are not fully
covered by the transmission tariff. This principal repayment of loans beyond 70% of the capital
cost needs to be financed by TANTRANSCO through additional borrowings.

24. Due to above mentioned reasons, the financial position of TANTRANSCO has
deteriorated over last 5 financial years- profit of ₹13.1 billion (2014) to a loss of ₹46.6 billion
(FY2018) resulting into an accumulated loss of ₹37.7 billion in FY2018 (Historical performance
annexed in Annexure “A”).

25. As of FY2019, the value of assets of TANTRANSCO likely to be allowed by TNERC for
transmission tariff setting in the future is ₹202.4 billion. It is after adjusting the difference (₹50.7
billion) between values of fixed assets (as on transfer date) considered by TNERC (₹94.6 billion)
and the book value of these assets in the TANTRANSCO’s accounts (₹43.8 billion). Out of
₹202.4 billion, assets of ₹16.8 billion is to be funded by consumer contributions, grants and capital
subsidies. The net amount is ₹185.6 billion, of which 70%, or ₹129.9 billion can be considered as
debt for which depreciation will be allowed, and thus TANTRANSCO has a recognized source for
repayment. However, the actual debt on TANTRANSCO’s books owed to external sources
(banks/ financial institutes) is ₹187.2 billion, and the difference of ₹57.3 billion (i.e. the amount in
excess of sustainable assets) cannot be repaid by TANTRANSCO from its tariff revenues.

26. Besides the external debt, TANTRANSCO owes ₹102.2 billion to the Tamil Nadu
Generation and Distribution Company Limited (TANGEDCO).5 This represents repayment and
interest amount of the loans that were transferred to TANTRANSCO at the time of unbundling,
and carrying cost on the amount paid by TANGEDCO on TANTRANSCO’s behalf in earlier years
and debited by TANGEDCO on 31 March 2018. TANTRANSCO has no revenue source to repay
this debt to TANGEDCO, as this does not represent any asset for the transmission business
recognized by the regulatory commission.

27. In summary, TANTRANSCO has ₹159.5 billion of liabilities that cannot be repaid through
its future transmission tariff revenues. In addition, owing to lower equity contributions to finance
its capital expenditure, there is a gap between the aggregate ROE and depreciation allowance
and its debt service obligation, for which it needs an alternative funding source. Unless any FRP
measures are undertaken the financial performance will continue to deteriorate.

F. Financial Restructuring Plan

28. The resolution of this issue is essential, to ensure that TANTRANSCO becomes financially
sustainable in the future. The solutions proposed acknowledge that TANTRANSCO’s revenue
approved by the TNERC does not provide it adequate cash flows to service the liability of ₹102.2
billion owed to TANGEDCO and ₹57.3 billion unsustainable liability owed to external creditors
(banks and financial institutes) including interest.

a) Reallocation of Generic Loans allocated to TANTRANSCO in the Final

Transfer Scheme

29. The amount sought from the Government of Tamil Nadu (GoTN) has also been computed
by reallocation of project loans and generic loans between TANTRANSCO and TANGEDCO. The

4 The equity contribution was an average of 11% of capital expenditure from FY2014 to FY2018
5 This amount is under reconciliation.

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allocation of project loans and generic loans between TANGEDCO and TANTRANSCO as on
date of unbundling as per final transfer scheme is shown in table below:

Table 3: Loan segregation as per transfer scheme – GO No 49

(All amount in ₹ billion)
As per Transfer Scheme TANGEDCO TANTRANSCO Total
Project loan 193.1 67.4 260.5
Generic loan - 59.5 59.5
Total 193.1 126.9 320.0
TANGEDCO = Tamil Nadu Generation and Distribution Corporation Limited, TANTRANSCO = Tamil Nadu
Transmission Corporation Limited
Source: Government of Tamil Nadu

30. In the meeting held under the Chairmanship of Additional Chief Secretary (Finance),
GoTN on 14 June 2019, it was agreed that determination of Generic Loan was not correct in the
transfer scheme. Based on internal discussions between TANGEDCO and TANTRANSCO, an
additional loan of ₹19.5 billion was re-assigned to generic loan from the project loan of
TANTRANSCO. The revised ratio of allocation of project loans between TANGEDCO and
TANTRANSCO is 80.12%: 19.88%. It was also agreed to re allocate generic loans between the
companies in the same ratio. Based on this, the revised loan allocation is as follows:

Table 4: Loan segregation as per transfer scheme – GO No 49

(All amount in ₹ billion)
As per Transfer Scheme TANGEDCO TANTRANSCO Total
Project loan 193.1 47.9 241.0
Reassigned Generic loan - 79.0 79.0
Total Loan 193.1 126.9 320.0
Reallocate Generic Loan in the ratio of Project Loan
Project loan ratio 80.12% 19.88%
Reassigned Generic Loan segregation 63.3 15.7 79.0
Revised total loan 256.4 63.6 320.0

31. A generic loan of ₹63.3 billion should be transferred from TANTRANSCO to TANGEDCO
as per the revised allocation.

a) Government Equity Injection to settle the Remaining

Unsustainable Liabilities of TANTRANSCO

32. TANTRANSCO shall approach the GoTN to seek equity support against the remaining
unsustainable loan liability, which is ₹57.3 billion. This equity assistance may be required over a
period of three years. The interest payable on the unsustainable loan during these 3 years shall
also be sought from the GoTN, which work out to ₹9.9 billion. Based on the understanding reached
at the meeting held on 14 June 2019 with the Finance Department of Tamil Nadu, the state government
has agreed to provide an equity injection of is ₹53.66 billion ($762 million) in three equal annual
installments starting from FY2021 for settling major portion of unsustainable liabilities. TANTRANSCO
shall use the proceeds from this equity infusion towards payment of loans and interest to external
creditors (banks and financial institutes). The balance amount of outstanding external loans is
expected to be serviced by TANTRANSCO through its ARR.

a) Adjustment of Inter-company receivables/payables between

TANTRANSCO and TANGEDCO
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33. There is a net payable of ₹102.2 billion from TANTRANSCO to TANGEDCO as on
31 March 2018. As discussed above, TANTRANSCO would not have adequate cash flows to
service the liability of ₹102.2 billion owed to TANGEDCO in future years. A significant contributor
to this outstanding amount (₹102.2 billion) is the additional generic loan (₹63.3 billion) allocated
to TANTRANSCO instead of TANGEDCO. TANTRANSCO had also paid interest on this
additional amount during the past years.

34. It has been agreed between TANTRANSCO and TANGEDCO that the amount payable
by TANTRANSCO to TANGEDCO will be adjusted in the books of accounts of both the
companies.

35. It is noted that intercompany payables and receivables as of 31 March 2018 need to be
confirmed through an intercompany reconciliation exercise. After the reconciliation of the amount,
the amount will be adjusted, based on the discussion with auditors and tax consultant, in the
following manner:
a) The amount payable to TANGEDCO in the books of TANTRANSCO will be
adjusted against the equity contribution from the holding company; i.e. TNEB
Ltd;
b) The amount receivable from TANTRANSCO in the books of TANGEDCO will
be adjusted against the receivable from holding company (TNEB Ltd); and
c) The amount will be reflected as payable to TANGEDCO and investment in
TANTRANSCO in the books of TNEB Ltd.

36. It is agreed by the two companies that no interest will be charged on the net amount
payable by either party.

a) Capping the Future Capital Expenditure at Sustainable Level

37. TANTRANSCO will revisit its proposed capital expenditure of ₹300.00 billion (approx.)
from FY2019–2020 to FY2021–2022. As per the direction of the Additional Chief
Secretary/Finance it will be maintained around ₹30.0 billion to ₹35.0 billion per year as in the
recent past until the company attains self-sufficiency.

38. The GoTN will provide equity contribution for an amount equal to 30% of the capital
expenditure for all future projects of TANTRANSCO until the time TANTRANSCO is able to
finance its equity portion of capital expenditure using its internal cash accruals.

39. The GoTN will also contribute ₹10.0 billion as equity to finance the counterpart finance of
proposed ADB-financed project. This will be part of the government equity contribution to finance
30% of capital expenditure.

a) Rescheduling of External Liabilities

40. It is noted that depreciation allowed by TNERC does not match the repayment obligation
of remaining external liabilities due to shorter tenor (10 years) of these loans. It is recommended
to reschedule these loans to have an average tenor of 12 years to match the accelerated
depreciation allowed by the regulator.

a) Annual Tariff Filing

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41. To prevent accumulation of financial losses in the future, it is further agreed that
TANTRANSCO and TANGEDCO will make regular annual tariff filings starting from FY2020.

Summary of Financial Restructuring Package

i. GoTN should provide equity support to TANTRANSCO for ₹53.66 billion towards settlement
of major portion of unsustainable liabilities. This can be provided in three equal annual
instalments.

TANTRANSCO should utilize these funds to prepay unsustainable loans external agencies
like Rural Electrification Corporation Limited (REC) and Power Finance Corporation Ltd.
(PFC) in 3 instalments over a period of 3 years.

ii. Balance REC and PFC loans should be restructured to loan with 12 years repayment period;

iii. Intercompany payables and receivables as of 31 March 2018 need to be confirmed through
an intercompany reconciliation exercise. After the reconciliation of the amount, the amount
will be adjusted, based on the discussion with auditors and tax consultant, in the following
manner:
a. The amount payable to TANGEDCO in the books of TANTRANSCO will be
adjusted against the equity contribution from the holding company; i.e. TNEB
Ltd.;
b. The amount receivable from TANTRANSCO in the books of TANGEDCO will
be adjusted against the receivable from holding company (TNEB Ltd); and
c. The amount will be reflected as payable to TANGEDCO and investment in
TANTRANSCO in the books of TNEB Ltd.

iv. Any inter-company payable from TANTRANSCO to TANGEDCO or vice versa will be
adjusted in the books of both the companies, as mentioned above. It is agreed that no
interest will be levied on the net amount after 31 March 2018.

v. GoTN agrees to maintain 30% equity contribution of TANTRANSCO’s capital

expenditure till the time TANTRANSCO can be funded through its retained earnings.

G. Impact of FRP on TANTRANSCO

42. The FRP will be implemented in FY2020−21. With above support, TANTRANSCO will turn
profitable by FY2023. Internal cash generation also results in improved debt and self-serviceability
of loans.

Table 5: Financial Parameters of TANTRANSCO Post FRP

2019 2020 2021 2022 2023 2024 2025
PAT (₹ million) (4,893) (6,307) (2,698) (633) 1,674 3,440 4,199
Current Ratio 0.59 0.35 0.39 0.43 0.85 0.86 0.86
DSCR 0.47 0.70 0.77 0.86 1.00 1.94 1.87
Debt/Equity 2.88 0.83 0.66 0.53 0.49 0.49 0.48
DSCR = debt service coverage ratio, FRP = financial restructuring plan, PAT = profit after tax
Source: Asian Development Bank staff estimate

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43. TANTRANSCO will have to undertake short-term borrowings in FY2019 and
FY2020 to finance the cash deficit but these liabilities can be repaid over FY2022–2026 with
improved operating cash flows. The return on equity generated from the equity portion of capex
shall improve the net profit and internal cash generation position whereby the company can fund
equity portion of capex from FY2026 onwards. The State Government’s equity commitment shall
reduce to zero eventually and the company will be able to self-sustain its growth.

H. Projected – Financial Performance

44. The projected Financial performance of TANTRANSCO is given below:

Table 6: TANTRANSCO-Summarized Projected Financial Performance (2019–2025)

(₹Million)
Item 2019 2020 2021 2022 2023 2024 2025
Profit and loss statement:
Revenue 32,060 35,537 42,311 45,960 49,575 53,187 55,943
Operating cost 14,523 15,485 16,507 17,629 18,820 20,083 21,428
EBITDA 17,537 20,052 25,803 28,331 30,756 33,104 34,515
Depreciation 9,913 10,969 12,025 13,345 14,665 15,985 17,305
EBIT 7,624 9,083 13,778 14,986 16,090 17,119 17,210
Interest Cost 12,517 15,389 16,476 15,618 13,956 12,733 11,858
PBT (4,893) (6,307) (2,698) (633) 2,134 4,385 5,352
Tax - - - - (460) (945) (1,153)
PAT 4,893) (6,307) (2,698) (633) 1,674 3,440 4,199

Cash flow statement:

Operating Cash flow 8,984 (80,158) 27,157 30,638 32,796 34,846 36,462
(21,431) (22,860) (23,520) (23,624) (23,473) (23,101)
Investing Cash flow
(20,680)
92,233 (3,031) (2,635) (2,778) (2,794) (2,872)
Financing Cash flow
(14,929)
(9,356) 127 448 639 858 1,049
Cash Increase / Decrease
(26,625)
Short term loan taken 25,399 9,356 - - - - -
ST Loan repaid - - (1,266) (4,483) (6,395) (8,579) (10,489)
Closing Cash balance - - - - - - -

Balance sheet:
LIABILITIES
Shareholders’ Funds 47,363 153,418 176,109 200,864 225,295 236,236 247,934
Non-current liabilities 180,646 179,755 170,219 159,544 149,577 153,753 157,320
Current liabilities 32,302 75,979 77,464 75,919 72,661 67,429 60,512
Total liabilities 460,311 409,152 423,791 436,327 447,533 457,417 465,766
ASSETS
Non-Current assets 384,351 398,382 411,357 423,012 433,347 442,362 450,057
Current Assets 75,960 10,770 12,434 13,315 14,187 15,056 15,709
Total Assets 460,311 409,152 423,791 436,327 447,533 457,417 465,766

45. Revenue. In the year post FY2019, the revenue growth is expected to be higher in the
period upto FY2021 due to higher expected capitalization and subsequent allowance in tariff. It is

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expected that the TANTRANSCO will file tariff petitions within stipulated time. Post FY2021, the
revenue is expected to increase at a year on year rate of 6-8%. There is no demand risk and
incase the projects are transmission projects commissioned as planned and capitalized, the
TNERC is expected to recognize the same and allow pass through in ARR. Considering that
TANTRANSCO has been suggested to file timely Petitions, the recovery of prudent costs will also
lead to a steady increase in revenues.

46. Profit. With the implementation of FRP measures, TANTRANSCO is expected to turn
profitable in FY2023. From a loss of ₹46.6 billion in FY2018, a profit of ₹1.67 billion is expected
in FY2023. In case, the grant from GoTN is received and measures as highlighted in FRP are
implemented, profitability of TANTRASNCO will sustain over the longer term.

47. Capital expenditure. During the last four-year period, annual capital expenditure
remained in the range of ₹30−35 billion, except for FY2015−2016, when the assets were revalued
to account for the impact of notification of the final transfer scheme. In the FRP scheme also and
as per discussion with GoTN, it has been suggested that the capital expenditure per year should
be maintained within a limit of ₹30-35 billion. Currently, for financial projections, yearly capex of
₹25 billion has been considered as a realistic estimate based on historical data.

48. Government’s share capital. The GoTN will provide equity contribution for an amount
equal to 30% of the capital expenditure for all future projects of TANTRANSCO until the time
TANTRANSCO is able to finance its equity portion of capital expenditure using its internal cash
accruals. Considering that capex of ₹25 billion, GoTN contribution per year will be ₹7.5 billion. The
return on equity generated from the equity portion of capex shall improve the net profit and internal
cash generation position whereby the company can fund equity portion of capex from FY2026
onwards. The State Government’s equity commitment shall reduce to zero eventually and the
company will be able to self-sustain its growth.

Table 7: Contribution from GoTN towards Equity portion of TANTRANSCO’s CAPEX

(₹Billion)
Item 2019 2020 2021 2022 2023 2024 2025
Equity for Capex 7.5 7.5 7.5 7.5 7.5 7.5 7.5
Equity for settling
- - 15.3 15.3 15.3
unsustainable loans
Equity from TNEB to setup
102.2
receivable- payables balance
Total equity 7.5 109.7 22.8 22.8 22.8 7.5 7.5

I. Projected Financial Ratio Analysis

49. Various financial ratios were computed for TANTRANSCO based on projections for the
period FY2019 to FY2025. A brief discussion on key financial ratios is provided in the following
paragraphs. The computed ratios for TANTRANSCO are tabulated in Table 7.

50. Liquidity ratios. The current ratio is improving from 0.55 to 0.85 between FY2010 to
FY2023 with the lowest value of 0.35 in FY2020. However, from FY2026 onwards, the current
ratio crosses the desired value of 1.0.

51. Debt management ratios. TANTRANSCO’s debt-service coverage ratio improves

gradually over the years from 0.47 in FY2019 to 1.00 in FY2023 when it is expected to turn
profitable.

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52. Profitability ratios. With time bound implementation of FRP and adherence to measures
as highlighted before, TANTRANSCO is expected to be profitable in FY2023. With 30% GoTN
equity contribution every year for capex, the debt equity ratio is expected to be less than unity.
With positive internal cash generation, the GoTN equity is expected to reduce from FY2026 and
the debt equity ratio is stabilized around 0.47 over the longer term.

J. Annexure

Appendix 1: Historical Financial Statements-TANTRANSCO

Profit and loss statement (2013-2018) (₹million)
Item 2013 2014 2015 2016 2017 2018
Revenues
Revenue from transmission of electricity 23,811 27,650 17,761 23,052 22,884 25,396
Other income 339 1,122 1,602 2,018 2,897 2,422
Total Operating Revenues 24,150 28,771 19,362 25,071 25,781 27,818

Operating Expenses
Repairs & maintenance expenses 75 126 110 135 151 118
Employee expenses 5,799 7,000 8,301 9,650 10,838 12,061
A&G expenses 233 1,248 1,530 2,512 2,497 2,732
Less: expenses capitalised (881) (1,200) (1,377) (1,530) (1,326) (1,307)
Total operating expenses 5,226 7,173 8,564 10,767 12,159 13,604

EBITDA
(Earnings before interest, tax, 18,923 21,598 10,799 14,304 13,621 14,214
depreciation and amortization)
EBITDA % 78% 75% 56% 57% 53% 51%
Depreciation and amortisation 2,995 3,123 5,680 4,876 5,908 7,523
EBIT (Earnings before interest and tax) 15,928 18,474 5,119 9,427 7,714 6,691

Financial Expenses:
Gross Interest expenses 13,299 7,239 9,274 13,793 13,104 15,657
Less: Interest capitalised (2,717) (2,239) (2,914) (3,195) (2,802) (3,486)
Total financial expenses 10,582 5,000 6,360 10,598 10,302 12,171
Other expenses/extra-ordinary items
Extra-ordinary items - - - - 7 8
Other debits 63 0 - 5 13 41,742
Net prior period charges/credits 2,920 394 (112) 1,458 141 (568)
Forex currency gains/(losses) - - - - - -
Total other expenses 2,982 394 (112) 1,463 161 41,182
Profit/ (Loss) Before Tax 2,365 13,080 (1,129) (2,634) (2,749) (46,661)
Current and deferred tax - - - - - -

Net Profit/(Loss) after tax 2,365 13,080 (1,129) (2,634) (2,749) (46,661)
Transfer to Balance Sheet 2,365 13,080 (1,129) (2,634) (2,749) (46,661)

Source: TANTRANSCO

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Cash flow statement (2013-2018) (₹million)
Item 2013 2014 2015 2016 2017 2018
A. Cash Flow from Operating Activities
Net profit/loss before tax and extraordinary items 2,365 13,080 (1,129) (2,634) (2,749) (46,661)
Adjustment for:
Depreciation 2,995 3,125 5,680 3,717 5,911 7,547
Interest income - - - - (0) (3)
Interest paid 13,299 7,239 9,274 13,793 10,302 12,171
F/x gain/Loss - - - - - (377)
Operating profit before working capital changes 18,658 23,444 13,825 14,877 13,464 (27,322)
Adjustments for changes in:
Trades & other receivables (46,080) (50,848) (60,382) (65,085) (40,015) (11,474)
Stocks/Inventories (769) 26 112 2,179 823 (846)
Short term loans and advances - - - - (44) 3
Other current assets - - - - (12) (13)
Long term loans and advances - - - - 1,648 (152)
Other long-term liabilities - - - - 2,486 2,870
Trade Payables - - - - 45,683 44,154
Other current liabilities 65,617 48,672 63,852 109,057 4,541 4,290
Short term provisions - - - - 119 579
Income tax - - - - - -
Net cash flow from operating activities 37,426 21,295 17,407 61,028 28,693 12,089
B. Cash Flow from Investment Activities
Investments in fixed assets (11,369) (30,482) (31,748) (142,184) (36,197) (29,175)
Interest income - - - - 0 3
Proceeds from Sale of Assets 13 20 6 (15,917) - -
Net cash used in investment activities (11,356) (30,461) (31,742) (158,101) (36,197) (29,172)
C. Cash Flow from Financing Activities
Share capital 5,069 1,690 8,711 11,044 - -
Reserve fund 869 4,176 1,950 107,430 - -
Changes in borrowings (18,748) 10,437 13,483 (8,011) 18,134 28,583
Interest paid (13,299) (7,239) (9,274) (13,793) (10,302) (12,171)
Short-term borrowings - - - - - 1,121
Net cash used in financing activities (26,109) 9,063 14,870 96,670 7,832 17,533
Cash opening balance 465 425 322 857 449 776
Cash increase /(decrease) for the year (39) (103) 535 (403) 327 450
Cash closing balance 425 322 857 453 776 1,226

Source: TANTRANSCO

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Balance sheet (2013-2018) (₹million)
Item 2013 2014 2015 2016 2017 2018
ASSETS
Current Assets
Cash & cash equivalents 425 322 857 453 776 1,226
Stocks 4,444 4,418 4,306 2,127 1,304 2,150
Receivables against supply of power 52,078 67,410 81,146 97,366 1,864 2,662
Short-term loans and loan advances 102 106 140 316 365 363
Sundry receivables 44,013 83,083 130,024 178,867 203,949 66,025
Other current assets - - - - - 34
Inter-unit balance 1,023 (2,535) (2,865) (3,018) (6,458) (5,806)
Total Current Assets 102,085 152,803 213,608 276,111 201,801 66,654

Non-current Assets
Gross Fixed Assets 128,953 142,272 176,436 305,441 338,954 370,589
Less: Accumulated Depreciation (41,028) (44,140) (49,804) (37,580) (49,556) (63,166)
Net fixed assets 87,925 98,131 126,632 267,861 289,398 307,423
Capital expenditure in progress 34,157 51,287 48,848 62,003 64,085 61,536
Long-term loans and advances - - - - - 305
Total Non-Current Assets 122,082 149,419 175,480 329,864 353,483 369,264
Rounding-off difference 0.10 0.00 (0.09) 0.00 0.00 0.00

Total Assets 224,167 302,222 389,088 605,975 555,284 435,919

LIABILITIES
Current Liabilities
Short term borrowings 6,274 6,274 6,274 - - 1,121
Other creditors/Trade payables - - - - - 175,174
Short term provisions (0) - - - - 1,589
Payment due on capital liabilities 906 499 262 5,641 94 206
Current portion- long-term borrowings - - - - 17,308 17,585
Other current liabilities 139,952 188,624 252,476 361,534 296,569 26,392
Total Current Liabilities 147,132 195,397 259,013 367,175 313,971 222,067

Non-Current Liabilities
Loan from GoTN (JICA/KfW) - - - 7,826 - -
FERV -Loan from GoTN (JICA/KfW) - - - 673 - -
Long-term borrowings 82,537 93,381 107,101 99,985 115,674 144,257
Contributions, grants and subsidies 477 658 810 14,172 14,867 24,838
Total Non-Current Liabilities 83,014 94,039 107,911 122,656 130,541 169,095

Equity
Equity share capital (Government) 28,409 30,099 38,810 41,355 41,355 47,414
Reserves and reserve funds 3,566 7,561 9,359 15,903 19,353 -
Surplus (37,954) (24,874) (26,003) 11,681 8,932 (37,730)
Revaluation reserve - - - 47,204 41,132 35,072
Total Equity (5,979) 12,786 22,165 116,144 110,772 44,757

Total Liabilities and Equity 224,167 302,222 389,088 605,975 555,284 435,919

Source: TANTRANSCO

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