Case 086Real estate and infrastructureHard

Group case: a 200 MW wind farm with a 32% plant load factor sells at Rs 3.2 a unit under a 25-year power purchase agreement, costs Rs 1,300 crore and runs on Rs 40 crore of opex. Work revenue, the project IRR, and the risks to discuss.

The situation

Your group of four has 40 minutes and one sheet. Pavanputra Wind is a 200 MW wind farm in a coastal district with a 25-year power purchase agreementA long-term contract under which a buyer, usually a state utility, agrees to take the power a plant generates at a fixed tariff. at Rs 3.2 per kWh with a state utility. The wind study gives a plant load factorActual generation as a share of what the plant would produce if it ran at full capacity every hour of the year. of 32%. Operating cost, including maintenance and land lease, is Rs 40 crore a year. The project costs Rs 1,300 crore to build and the utility has a record of paying three to six months late.

Ignore tax and degradation for the first pass and treat the farm as unlevered. The fund's infrastructure hurdle for contracted assets is about 10% at the project level.

Your task

Build revenue and EBITDA from the physical numbers, compute the project IRR and payback, and set out the three risks the group should present and how each one moves the return.

Quick check

Which single input should the group spend most of its 40 minutes on?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Revenue is about Rs 179 crore, EBITDA about Rs 139 crore, and the project IRR about 9.7% with payback in year 10. 200 MW for 8,760 hours at 32% is 561 million units, which at Rs 3.2 is Rs 179 crore. The return is just below a 10% hurdle at 32% and falls to about 7.5% at 28%, so the group should present the wind resource as the first risk, the utility's payment delays as the second, and the end-of-contract value as the third.

Step 1How do you get from megawatts to rupees?

Multiply through the chain and say each unit. A water pump rated at 200 litres a minute does not deliver that all day; it delivers what the supply allows. 200 MW running every hour would make 1,752 GWh a year; at a 32% load factor it makes 561 GWh, which is 561 million units; at Rs 3.2 a unit that is Rs 179.4 crore. Opex of Rs 40 crore leaves EBITDA of Rs 139.4 crore, a 78% margin, which is normal for a plant with no fuel. Note the conversion out loud: a GWh is a million kWh, and a crore is ten million, so 560 million units at Rs 3.2 is Rs 1,794 million, Rs 179 crore.

200 MW for 8,760 hours at a 32% load factor yields 561 million units, Rs 179 crore at Rs 3.2 a unit and Rs 139 crore of EBITDA after opex; the tariff and term are contracted, so the load factor is the risk the investor actually carries.

Step 2What return does Rs 1,300 crore buy?

Rs 139 crore a year for 25 years against Rs 1,300 crore up front. The simple payback is 9.3 years, so the capex is back in year 10 and the remaining 15 contracted years are the return; the IRR of that stream is about 9.7%. That is a project-level, pre-tax, unlevered number, which is how an infrastructure team talks first. Debt at 8 or 9% on 70% of the cost would lift the equity IRR into the mid-teens, and the group should say so without being asked, and also say that it ignored degradation of a per cent or so a year and the tax position, both of which would trim the figure.

Rs 1,300 crore goes out in year 0 and Rs 139 crore comes back each year for 25 years, so the cumulative line crosses zero in year 10 and the 15 contracted years after that produce a project IRR of about 9.7%.

The relationship

1{,}300 = \sum_{t=1}^{25} \frac{139.4}{(1+r)^t} \;\Rightarrow\; r \approx 9.7\%

1,300	capex, Rs crore, at year 0
139.4	yearly EBITDA, Rs crore, flat for 25 years
r	the project IRR, the rate that makes the 25 flows worth the capex

What it says in wordsThe project IRR is the discount rate at which 25 years of contracted cash exactly repays the construction cost.

Step 3What are the three risks, and how does each move the number?

First, the wind. Every point of load factor is worth about Rs 5.6 crore of revenue and EBITDA, so 28% gives Rs 117 crore and an IRR near 7.5%, while 36% gives Rs 162 crore and near 11.7%. The group's first ask is how many years of mast data sit behind the 32% and whether the number is a P50 or a P90 estimate. Second, the counterparty: a tariff is only as good as the utility that pays it, and three to six months of delay means the project needs working capital for Rs 45 to Rs 90 crore of unpaid bills and carries the risk of a renegotiation. Third, the end of the contract: year 26 onwards is merchant power at whatever the market pays, and a 25-year PPA on a 25-year asset leaves nothing for a buyer in year 10 to value beyond the remaining contract.

Plant load factor	Units, million	Revenue	EBITDA	Project IRR
28%	491	157	117	7.5%
32% (wind study)	561	179	139	9.7%
36%	631	202	162	11.7%
PLF for about 8%				28.9%

Rs crore. Four points of load factor either side of the wind study move the project IRR from about 7.5% to about 11.7%, and the return drops to roughly 8% at a load factor near 29%, which is why the group's first question is about the quality of the wind data.

In a group case the content is half the mark. Agree the chain of numbers in the first ten minutes, assign one risk each, and present a view: at 32% the project is marginal against a 10% hurdle unlevered, so the fund should bid only with debt in the structure and a P90 wind case that still clears the lender's cover ratios. A group that argues about the arithmetic for 30 minutes and presents no view has failed the exercise whatever its numbers say.

Where candidates lose it

The usual loss is in the units: megawatts to kilowatt-hours, hours in a year, and crore. One slipped zero makes the farm look either worthless or absurdly profitable, and the group that checks its revenue line against a sanity figure, around Rs 1 crore per MW per year here, catches it.

The second is treating the tariff as the risk. The tariff is signed; the wind is not. A group that spends its time on tariff scenarios has read the sheet backwards.

What the interviewer asks next

The lender offers 70% of cost at 9% with a 1.3x debt service cover test. Does the P90 wind case pass it?
The utility proposes cutting the tariff to Rs 2.9 in exchange for paying on time. Take it or not?
How would a 1% annual degradation in output change the IRR?

Company names and figures are illustrative.