THAR COAL PRICING FRAMEWORK

STANDARDS & GUIDELINES – IN TERMS OF RULE 11(1) OF THAR

COAL TARIFF DETERMINATION RULES 2014

August, 2015

Thar Coal & Energy Board

Government of Sindh
Content

Chapter 01 – Introduction 4
1.1 Scope of the Thar Coal Pricing Framework 4
1.2 Reference Guidelines 4
1.3 Layout of the Document 5

Chapter 02 – Thar Coal Tariff 7

2.1 Tariff Components 7
2.2 Tariff Payment Mechanism 14
2.3 Elements of the Tariff 15

Chapter 03 – Tariff Determination Stages 18

3.1 Feasibility Stage 18
3.2 Contract Stage 18
3.3 Commercial Operations Stage 18
3.4 MYT Periods 19

Chapter 04 – Tariff Escalations & Indexations 20

4.1 Operations & Maintenance (O&M) Cost 20
4.2 Working Capital Interest 24
4.3 Insurance Cost 25
4.4 Equity Payments 26
4.5 Debt Payments 26
Acronyms

CAPEX Capital Expenses / Expenditure

COD Commercial Operations Date
CPI Consumer Price Index
CSA Coal Supply Agreement
EPC Engineering, Procurement, and Construction
FS Feasibility Stage
FX Foreign Exchange
GoP Government of Pakistan
ICB International Competitive Bidding
IDC Interest During Construction
IRR Internal Rate of Return
KIBOR Karachi Inter-Bank Offer Rate
LIBOR London Inter-Bank Offer rate
MD Managing Director
MYT Multi-Year Tariff
NASDAQ NASDAQ Stock Market
NBP National Bank of Pakistan
NEPRA National Electric Power Regulatory Authority
O&M Operations and Maintenance
OGRA Oil and Gas Regulatory Authority
OPEX Operational Expenses / Expenditure
PBS Pakistan Bureau of Statistics
PKR Pakistani Rupees
PPA Power Purchase Agreement
PPI Producer Price Index
RFO Residual Furnace Oil
ROE Return on Equity
SBP State Bank of Pakistan
SEZ Special Economic Zone
TCEB Thar Coal & Energy Board
TT & OD Telegraphic Transfer and On Demand
US BLS United States Bureau of Labour and Statistics
USD United States Dollars
WPPF Workers’ Profit Participation Fund
WWF Workers’ Welfare Fund
Thar Coal Pricing Framework

Chapter 01 – Introduction

1.1 Scope of the Thar Coal Pricing Framework

Thar Coalfields, located in the district of Tharparkar, Sindh, Pakistan, is one of the largest lignite
coalfields, with an estimated reserve of 175 Billion tonnes of coal. In the context of Pakistan’s energy
requirement, coal is identified as a major fuel source for power generation that has significant
indigenous reserves to catalyse sustain economic growth. The development of Thar Coalfields is
critical to securing the energy security of the country and promoting economic growth.

For the promotion and development of the said fields, Thar Coal and Energy Board (TCEB), through
Thar Coal and Energy Board Act, 2011 and Sindh Act No XX, 2011, was established under the Chief
Executive of Sindh, with representation on both federal and provincial levels, as a one stop
government organization in matters relating to Thar Coal. The Economic Coordination Committee
(ECC) of the Cabinet Division of Government of Pakistan in its decision dated October 15, 2010 also
mandated the organization as the sole authority for regulating the price of coal in Thar.

This document serves to outline a uniform, transparent, objective and predictable mechanism for
pricing of lignite coal extracted from Thar Coalfields.

1.2 Reference Guidelines

The following guidelines are pursuant to Thar Coal Tariff Determination Rules 2014. The Thar Coal
Tariff Determination Committee constituted under Rule 3(1) of the said Rules shall clarify and
interpret the following guidelines where necessary and applicable.

In view of the geotechnical & hydrological factors involved in Coal Mining Projects, a number of risks
and uncertainties prevail at different levels of development and execution of such projects. It is not
uncommon to have differences among the estimated costs at project feasibility stage, the costs
quoted at time of finalization of contracts, and the actual costs incurred for the development of the
project (at COD). In order to mitigate the risks of such exposure, a multistage pricing framework is
adopted.

The pricing mechanism, outlined in this document, for determination of coal tariff is pursuant to
Rule 11 of Thar Coal Tariff Determination Rules, 2014 and is governed by basic principles that are
listed below.

1 Lignite mining industry in Pakistan will gradually mature over a period of time resulting in cost
and project management efficiencies. As we progress towards a more stable business
paradigm, these efficiencies will bear a positive impact on tariff regimes resulting in more
competitive tariffs for the end consumer. The concept of MYT regime fundamentally reflects

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Thar Coal Pricing Framework

the transience of mining operations that will progressively achieve cost and operational
efficiencies. The MYT regime establishes the mechanism under which such systemic
improvements will be reflected in subsequent determinations.

2 The Thar Coal Tariff is designed on the basis of a cost-plus mechanism in order to cover (a)
debt servicing costs including both interest charge and principle repayments, (b) equity
returns to the sponsors, and (c) operational costs incurred over the duration of the project.

3 The early stage commercial viability of the mining projects operating in Thar Coalfields
potentially relies on the off-take agreements of lignite from the mines at a cost that serves
the dual objective of sustainable revenues for the mine as well as an affordable and reliable
fuel supply for the downstream industry, most notably mine mouth power generation
installations. The initial viability of lignite mining invariably limits the primary application of
coal extracted from Thar Coalfields to utilization by such mine mouth power plants. The coal
tariff is accordingly structured to enable ease of integration with the power tariff.

4 The coal tariff shall be adjusted at the Commercial Operations Date, on the basis of
stipulated escalations, whereas during the operational phase of the mining project,
indexations and escalations is provided for local & foreign inflation, exchange rate variations,
and base interest rate fluctuations on a periodic basis. A provision for true up at
predetermined intervals is made under the ambit of a Multi Year Tariff Regime.

5 The coal tariff shall be computed on the basis of delivered price of coal at mine mouth, and a
further charge for transportation shall be computed for delivery to the battery limit of each
power plant being served. This total price of coal shall be determined by TCEB at the time of
tariff determination and subject to revisions / indexations of tariff.

6 The coal tariff shall be computed on the basis of such fiscal incentives as are confirmed by
law through enabling instruments, such as notified SROs, at the time of determination, and
any changes / change in law within the validity of the tariff regime shall be processed as
pass-through in the tariff or as reimbursable.

1.3 Layout of the Document

The document has been structured for ease of navigation, and in keeping with the logical flow of
tariff computation, as detailed hereunder.

Chapter 01 – Introduction

The first chapter of this document briefly introduces the scope of the pricing framework, and
outlines the Reference Guidelines for Thar Coal Tariff, as well as indicates the layout of the
document.

Chapter 02 – Thar Coal Tariff

The scope and reference guidelines of Thar Coal Tariff are followed by introduction of the tariff
itself, the overall tariff structure, individual tariff components, payment mechanism and the basis of
their computation. This chapter also outlines the principles guiding determination of tariff.

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Thar Coal Pricing Framework

Chapter 03 – Tariff Determination Stages

This chapter identifies the different stages of tariff determination over the duration of project
implementation, detailing the basic eligibility requirements for submission of a petition at each
stage.

Chapter 04 – Escalations & Indexations

The final chapter of the document details the indexation structure applicable for each tariff
component, which essentially lays down the framework enabling escalation of tariff to match the
justifiable costs incurred during mining operations.

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Thar Coal Pricing Framework

Chapter 02 – Thar Coal Tariff

2.1 Tariff Components

The Thar Coal Tariff is structured as a two-part tariff. The coal tariff broadly comprises of ‘production payment’ and ‘capacity payment’, where the payment
mechanism associated with each is discussed in more detail in the subsequent sections of this Chapter. The Thar Coal Tariff shall be determined in terms of
‘United States Dollars/ (equivalent) PKR per Tonne’ on the basis of the formula given below, which shall include, but not be limited to, the following
components which shall be determined on the basis of the principles contained in this document.
Production Payment Capacity Payment

Coal Tariffx = ⏞
Variable O&Mx + Royaltyx + ⏞
Fixed O&Mx + Working Capital Interest x + Insurancex + Equity Returnsx + Debt Servicing x + Coal Transportationx

Where

Coal Tariff𝑥 is the annual Coal Tariff of the Mining Project located in Thar Coalfields for period x, where x is a year from 1 to n
Variable O&M𝑥 is the annual Variable Operations & Maintenance tariff component for period x, where x is a year from 1 to n
Royalty𝑥 is the annual Royalty tariff component for period x, where x is a year from 1 to n
Fixed O&M𝑥 is the annual Fixed Operations & Maintenance tariff component for period x, where x is a year from 1 to n
Working Capital Interest 𝑥 is the annual Cost of Working Capital tariff component for period x, where x is a year from 1 to n
Insurance𝑥 is the annual Cost of Insurance tariff component for period x, where x is a year from 1 to n
Equity Returns𝑥 is the annual Return on Equity tariff component for period x, where x is a year from 1 to n
Debt Servicing 𝑥 is the annual Debt Servicing tariff component both principal and interest for period x, where x is a year from 1 to n
Coal Trnsportation𝑥 is the annual Cost of Transportation of coal to respective power plant(s) for period x, where x is a year from 1 to n
n is the total number of consecutive years for which the tariff is to be determined for the Mining Project

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Thar Coal Pricing Framework

a. Variable Operations & Maintenance (O&M) Cost

The Variable O&M Costs can be identified as either local or foreign components on the basis
of currency.

The computation of the annual Variable O&M cost component of the Thar Coal Tariff shall be
on the basis of the formula provided below, where the sub components are provided as a list
of representative costs.
Variable O&M ─ Local Variable O&M ─ Foreign
⏞
Powerx + Dieselx + Labourx + ⏞
Sparesx + Tyresx + Asset Replacement x
Variable O&Mx =
Mining Capacityx
Where

Variable O&Mx is the annual Variable O&M tariff component for

period x, where x is a year from 1 to n

Powerx is the annual costs of power utilization for the period

x, where x is a year from 1 to n

Dieselx is the annual costs of diesel utilization, for the period

x, where x is a year from 1 to n

Labourx is the annual costs of engaging direct labour for

period x, where x is a year from 1 to n

Sparesx is the annual costs of spares & consumables for

period x, where x is a year from 1 to n

Tyresx is the annual costs of tyres for main equipment for

period x, where x is a year from 1 to n

Asset Replacement x is the annual levelized costs of asset replacement for

period x, where x is a year from 1 to n

Mining Capacityx is the declared Mining Capacity of the Project for

period x, where x is a period from 1 to n

n is the total number of consecutive years for which

the tariff is to be determined for the Mining Project

b. Royalty

Government of Sindh (GoS) shall charge a royalty on number of tonnes of coal produced,
which shall be allowed as a cost to the Petitioner. The applicable royalty for any given year
shall be notified by GoS, as may be revised from time to time, and for the purposes of tariff
shall be computed on basis of the formula given overleaf.

Royaltyx = max [𝑅, (Coal Tariffx − Royaltyx ) × 7.5%]

Where

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Thar Coal Pricing Framework

Royaltyx is the annual Royalty tariff component for period x,

where x is a year from 1 to n

Coal Tariffx is the annual Coal Tariff of the Mining Project

located for period x, where x is a year from 1 to n
R is Rupee rate of Royalty per ton of coal as
applicable for year ‘x’.
n is the total number of consecutive years for which
the tariff is to be determined for the Mining Project

c. Fixed Operations & Maintenance (O&M) Cost

The Fixed O&M Costs can be identified as either local or foreign components on the basis of
currency.

The computation of the annual Fixed O&M cost component of the Thar Coal Tariff shall be on
the basis of the formula provided below, where the sub components are provided as a list of
representative costs.
Fixed O&M ─ Local Fixed O&M ─ Foreign
⏞
Overheadsx + Rehabilitationx + Powerx + ⏞
Overheadsx
Fixed O&Mx =
Mining Capacityx
Where

Fixed O&Mx is the annual Fixed O&M tariff component for period
x, where x is a year from 1 to n

Overheadsx are local or foreign annual overhead costs, for the

period x, where x is a year from 1 to n

Rehabilitationx is the annual costs of village rehabilitation for the

period x, where x is a year from 1 to n

Powerx is the annual costs of power for period x, where x is a

year from 1 to n

Mining Capacityx is the capacity of the Mining Project for period x,

where x is a period from 1 to n

n is the total number of consecutive years for which

the tariff is to be determined for the Mining Project

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Thar Coal Pricing Framework

d. Cost of Working Capital

A Working Capital facility shall be allowed to the Mining Project on the basis of periods allowed for the cost heads tabulated hereunder, or as
determined by TCEB on a case to case basis. Inventory of Coal and Accounts Receivables shall be priced solely on production payments, based on the
fact that capacity payments shall be allowed to the Petitioner on the basis of available capacity and shall thus not be tied up in the inventory.

Working Capital Cost Heads Period Basis – as determined by TCEB on a case to case basis subject to the
following limits
O&M Advance –(WC O&M) Up to Thirty (30) Days –
Accounts Receivables (Production Payment Tariff) – (WC AR) Up to Thirty (30) Days
Inventory – Coal (Production Payment Tariff) – (WC I) Up to Thirty (30) Days

Inventory – Spares / Consumables – (WC S&C) Up to One hundred & Eighty (180) Days

Inventory – Diesel - (WC D) Up to Twenty One (21) Days

The interest charge of this Working Capital Facility shall be a part of the Thar Coal Tariff, where the interest rate for this facility shall be determined
by TCEB on the basis of a reasonable spread over the prevailing 1 Month KIBOR rate, or the applicable rate of financing approved by TCEB in this
regard. The annual Working Capital Interest component of the Coal Tariff shall be calculated on the basis of the formula provided hereunder

𝑛 ∗ (𝑊𝐶 𝑂&𝑀)𝑥 𝑛 ∗ (𝑊𝐶 𝐴𝑅)𝑥 𝑛 ∗ (𝑊𝐶 𝐼)𝑥 𝑛 ∗ (𝑊𝐶 𝑆&𝐶)𝑥 𝑛 ∗ (𝑊𝐶 𝐷)𝑥 𝐾𝐼𝐵𝑂𝑅 + 𝑦%
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑥 = [ + + + + ]X
365 365 365 365 365 𝑀𝑖𝑛𝑖𝑛𝑔 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦𝑥

Where

Cost of Working Capitalx is the annual Cost of Working Capital tariff component for period x, where x is a year from 1 to n

KIBOR x is the benchmark Karachi Inter Bank Offer Rate prevailing at the time of tariff determination

y%x is the spread on KIBOR assessed by TCEB to be allowable to mining projects from time to time

Mining Capacityx is the capacity of the Mining Project for period x, where x is a period from 1 to n

n is the period (in days) for which working capital is allowed for each of the respective cost heads

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Thar Coal Pricing Framework

e. Cost of Insurance

The Petitioner shall procure the required insurances against the insurable risks in accordance with best industry practices during the operational
phase of the Mining Project. This Cost of Insurance, as incurred and approved by TCEB, shall be allowed as a Thar Coal Tariff component.
Cost of Insurancex
Insurancex =
Mining Capacityx
Where

Insurancex is the annual Insurance tariff component for period x, where x is a year from 1 to n

Cost of Insurancex is the annual cost of insurance, as approved by TCEB, for period x, where x is a year from 1 to n

Mining Capacityx is the capacity of the Mining Project for period x, where x is a year from 1 to n

n is the total number of consecutive years for which the tariff is to be determined for the Mining Project

Note: The Cost of Insurance shall be subject to a maximum limit as determined by TCEB from time to time.

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Thar Coal Pricing Framework

f. Equity Returns

The Petitioner shall undertake the Mining Project within a range of 20% - 30% Equity
contribution. The upper ceiling of Equity contribution for specific project(s) shall be as
determined by TCEB on a case-to-case basis. The parameters for determination of upper
ceiling of Equity by TCEB will be largely governed by, amongst other things, the overall
economic parameters impacting availability of capital and the progressive growth and
development of indigenous skill sets for open pit mining in the country, etc. In case the equity
contribution is more than as determined by TCEB, the excess equity shall be deemed and
treated as debt financing. The Petitioner shall be entitled to equity returns based on the
stipulated IRR, as declared by TCEB from time to time, and this component shall be computed
as provided hereunder.
Cash Outflowi y%
∑ti=0 × (1 + y%)t ×
(1 + y%)i 1 − (1 + y%)−n
Equity Returnsx =
Mining Capacityx

Where

Equity Returnsx is the annual Equity Returns tariff component for

period x, where x is a year from 1 to n

Cash Outflowi is the annual equity injections for the period i, where
i is a year from 0 to t

Mining Capacityx is the capacity of the Mining Project for period x,

where x is a year from 1 to n

y% is the Equity IRR percentage applicable for the

Mining Project, as declared and approved by TCEB

t is the total number of consecutive years between the

date of financial close and COD, as approved by TCEB

n is the total number of consecutive years for which

the tariff is to be determined for the Mining Project

g. Debt Principal Charge

The Petitioner is allowed to secure debt financing either in local or foreign denominated
currency, against the applicable financing rate, as approved by TCEB. The convertibility and
repatriation of the principal amount, as well as, the interest amount shall be allowed in the
respective approved foreign denominated currency. The repayment period of the loan shall be
a minimum of ten (10) years, from the Commercial Operations Date. The computation of the
Debt Principal Charge component of the Thar Coal Tariff shall be in accordance with the
formula provided hereunder, or on the basis of the applicable debt repayment structure, as
approved by TCEB.
y%
[Debt Facility × ] − (Debt Principalx × y%)
1 − (1 + y%)−t
Debt Principal Chargex =
Mining Capacityx

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Thar Coal Pricing Framework

Where

Debt Principal Chargex is the annual Debt Principal Charge tariff component
for period x, where x is a year from 1 to n

Debt Facility is the amount of debt facility secured by the

Petitioner for the Mining Project, as approved by
TCEB

Debt Principalx is the amount of debt principal outstanding at the

beginning of period x, where x is a year from 1 to n

Mining Capacityx is the capacity of the Mining Project for period x,

where x is a year from 1 to n

y% is the annual financing rate of the debt facility

secured for the Mining Project, as approved by TCEB

t is the total number of consecutive years for which

the debt facility has been secured for the Mining
Project

n is the total number of consecutive years for which

the tariff is to be determined for the Mining Project

h. Debt Interest Charge

The cost of debt servicing (interest payments) shall be based on the financing rate secured for
the debt facility, for which the financing spread over and above the applicable interbank offer
rate shall be determined and approved by TCEB to be a reasonable cost of financing. The Debt
Interest Charge component of the Thar Coal Tariff for a given year shall be computed as
provided in the formula hereunder.
Debt Principlex × y%
Debt Interest Chargex =
Mining Capacityx
Where

Debt Interest Chargex is the annual Debt Interest Charge tariff component
for period x, where x is a year from 1 to n

Debt Principlex is the amount of debt principal outstanding at the

beginning of period x, where x is a year from 1 to n

Mining Capacityx is the capacity of the Mining Project for period x,

where x is a year from 1 to n

y% is the annual financing rate of the debt facility

secured for the Mining Project, as approved by TCEB

n is the total number of consecutive years for which

the tariff is to be determined for the Mining Project

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Thar Coal Pricing Framework

i. Cost of Transit

Based on the mode of transportation utilized i.e. rail, road, or conveyers etc. the cost of transit
shall be assessed and built into the total tariff, factoring in the distance of the plant from the
mine. This shall reflect the cost of transportation of coal from the mine’s stockyard till the
point of exchange, which shall be within the battery limit in the case of power plants.
Moreover, a transportation and handling loss of 0.20%* for mine mouth off-takers (utilizing
self-operated modes of transit) and 1.00%* for off-takers located at a distance (and utilizing
public modes of transportation for delivery of coal) shall be allowed on the delivered coal to
account for pilferage, theft, spillage etc. As a general guideline it is emphasized that for mine
mouth power plants conveyor systems have proven to be cost effective and efficient and for
long haul rail transport has proven to be efficient and a least cost mode of transport. The
Petitioner is to take these factors in consideration and detailed feasibility studies may be
presented prior to seeking inclusion of transportation costs in the tariff.
(*these values to be subject to review on a progressive basis).

Variable Overheadsx + Fixed Overheadsx

Transportationx =
Mining Capacityx
Where

Transportationx is the annual cost of coal transportation tariff

component for period x, where x is a year from 1 to n

Variable Overheadsx is the variable cost of transportation e.g. rate of fuel,

consumables, etc. charged for period x, where x is a
year from 1 to n

Fixed Overheadsx is the fixed cost of transportation, e.g. driver salaries

charged for period x, where x is a year from 1 to n

Mining Capacityx is the capacity of the Mining Project for period x,

where x is a year from 1 to n

n is the total number of consecutive years for which

the tariff is to be determined for the Mining Project

2.2 Tariff Payment Mechanism

As a two-part tariff, payments of the Thar Coal Tariff shall be bifurcated into ‘production payment’
and ‘capacity payment’, which can be broadly related to as variable costs and fixed costs, where the
Production Payment shall be determined and paid in terms of ‘United States Dollars / (equivalent)
PKR per Tonne’ as product of actual off-take quantity of coal in a given year and the sum of
Production Payment components of the Thar Coal Tariff for that year, which shall include the
following.

a. Variable O&M – Local

b. Variable O&M – Foreign
c. Royalty

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Thar Coal Pricing Framework

The Capacity Payment shall consist of the fixed costs of the Thar Coal Tariff, and determination of
Capacity Payment components of the Thar Coal Tariff shall be in terms of ‘PKR per Tonne’, subject to
the availability of the capacity to produce as declared by the Petitioner in its Petition for the given
year. Capacity Payments shall be further subject to TCEB’s approval of availability of capacity and the
standards of performance benchmarked in the Coal Supply Agreement (CSA) (such as the Lower
Heating Value (LHV) of the extracted coal). The components of the Thar Coal Tariff to be categorized
as Capacity Payment components shall include the following.

a. Fixed O&M – Local

b. Fixed O&M – Foreign
c. Cost of Insurance
d. Cost of Working Capital
e. Equity Returns
f. Debt Principal Charge
g. Debt Interest Charge

If the off-take of the mine is to be lower than the mining capacity declared in the Petition, in any
given year, as a direct result of events beyond the reasonable control of the Petitioner, then the CSA
shall cater for the off-taker to compensate for the differential between the available Capacity and
the off-take Capacity as per the per ton tariff apportioned for Capacity Payment . However, if the
Petitioner is unable to produce to the declared capacity approved by TCEB, as a direct result of
events within the reasonable control of the Petitioner, then the Petitioner shall be able to recover
Capacity Payment only to the extent of the availability of the production capacity of the Mining
Project that the Petitioner is able conform to for the given year.

2.3 Elements of the Tariff

Determination of the Thar Coal Tariff shall be based on the formulae contained in this Chapter,
governed by the Reference Guidelines outlined in the previous chapter, and guided by the various
principles listed hereunder.

7 The Project Cost is broadly defined to include the following representative list of cost heads,
based upon information provided by the Petitioner and as assessed and determined by TCEB

a. EPC Cost – Equipment & Procurement, Construction Services, Overburden Removal

Services, Power Generation Services, Lignite Production Services, Cost of Diesel, Taxes &
Duties etc.

b. Non EPC Cost – Civil Works & Structure, Residential Buildings, Vehicles, Engineering &
Consultancy, Approval & Process Fees, Administration & Management etc.

c. Insurance During Construction

d. Financing Fees & Charges – Debt Arrangement Fee, Debt Administration Fee, Debt
Commitment Charges, LC Charges etc.

e. Interest During Construction

8 Recognition of Project Costs shall be as determined by TCEB and in any case restricted to the
period subsequent to grant of the Exploration License to the Petitioner, up to achievement of
commercial operations within the timeframe approved by TCEB. Cost overruns if any, as a

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Thar Coal Pricing Framework

result of delay in mine development/achievement of COD shall only be allowed to be

capitalized that are consequent to events for which specific approval and extension has been
granted by TCEB to the Petitioner.

9 Equity injected into the Project subsequent to the grant of the Exploration License and prior to
the date of Financial Close shall be treated as an overnight cost as at that date, and equity
returns shall be computed on the basis of cash flows resulting thereafter up to the COD.
However, only such cash flows shall be taken into consideration, which are utilized to finance
the Project Costs approved by TCEB.

10 Project costs shall be specifically assessed on a case-to-case basis and any adjustments to the
same may be allowed if TCEB considers it to be within reasonable limits.

11 The design life of the power plant, the primary off-taker, is 30 years. Accordingly economic
justification prevails in favour of determining a tariff for a 30 year period. Tariff for capacity
enhancements shall be determined for the remaining concession period. TCEB, on the merits
of each project, shall set the tariff to be prevalent thereafter on case to case basis.

12 Mine development is one integrated activity conforming to a single mine pit with certain initial
capacities, which are ramped up to optimum levels of production in a seamless extension. This
certain initial capacity needs to be economically justifiable, the standard of which shall be set
by TCEB from time to time. Moreover, in order to realise economies of scale for the benefit of
end consumer, ramping up to higher capacities shall be encouraged at the earliest
opportunity. Tariff determination may take place for multiple capacities prevailing at different
times over the concession period, however such enhancement to more economic capacities
may be enforced through penalties by TCEB on a case to case basis, in consideration of off
take availability. Wherever applicable, the pre-COD sale of coal extracted for purposes of
testing shall be charged at the latest available Coal Tariff determined by TCEB. However, sale
of peat, or coal of significantly lower quality than expected to be extracted from the mine,
shall be made at its actual realisable value. Proceeds from sale of coal prior to commercial
operations shall be used to offset the Project Costs by the realised amount.

13 The first MYT Period shall commence at COD, and shall run for a total of two (02) years,
whereas subsequent MYT Periods shall run for a total of five (05) years.

14 The tariff thus provided will not contain any increase in the equity base from COD for the
duration of the Mining Project. If, however, during the operational phase the mine plan needs
fresh investment the Petitioner will have the option to petition for a new tariff for the next
MYT Period, or, where such changes are required at any time during an existing MYT Period.
At any point in time during the MYT Period, the Petitioner can file a tariff petition with TCEB in
order to have a revision in its tariff for any and all future MYT Periods provided however, the
fundamentals of Debt:Equity base remain unchanged.

15 At the end of each MYT Period, a true up adjustment shall be made to compare actual versus
the projected expenses (based on escalation indices), and the difference will be recovered
through the tariff in the subsequent MYT Period. If capacity payments in an MYT Period are
recovered by the Petitioner over and above the aggregate expense of the Capacity Payment
components as determined by TCEB for the said MYT Period, then the Coal Tariff in the next
MYT Period shall be adjusted to compensate for the over-recovery of costs.

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16 Recurring Capital Expenditure, or Cost of Asset Replacement, shall be, if applicable, allowed on
an annualized basis as part of the Variable O&M of the Thar Coal Tariff determined by TCEB.

17 A transportation and handling loss shall be allowed to the Petitioner at 0.20% for mine mouth
power plants and 1.00% for non-mine mouth power plant (located at a distance), or such
amount as specified by TCEB from time to time, in order to account for pilferage, theft,
adulteration, spillage, erosion etc. of coal in transit.

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Thar Coal Pricing Framework

Chapter 03 – Tariff Determination Stages

3.1 Feasibility Stage

On completion and approval of the technical and financial bankable feasibility studies, the Petitioner
may seek determination of a Feasibility Stage Coal Tariff for the proposed project that shall enable
the Lessee to (a) attract financing for the project, and (b) negotiate with the contractors for the
finalization of the contract price. Seeking a tariff at the Feasibility Stage is not mandatory and is
entirely the discretion of the Petitioner.

3.2 Contract Stage

The Petitioner shall negotiate and finalize the contractual arrangements (including the contract
price) for the execution of the Mining Project. The Project Cost at this stage shall be based on
extensive investigation / engineering design, work plans, and legally binding contractual
arrangements. Subsequent to the finalization of the said contracts, the Petitioner shall file a petition
with TCEB for the adjustment of the Feasibility Stage Coal Tariff (if applicable) on the basis of the
contracted costs.

The Reference Coal Tariff shall be determined on the basis of certain assumptions with regards to
debt terms including tenor, spread, and financing fees & charges. As long as the Petitioner is able to
secure financial closure for the project within the limits defined by these assumptions, the Reference
Coal Tariff shall be trued up at the time of COD. However, if financial closure unable to be secured
within the said limits, the Petitioner shall have the option to file a limited scope Petition for Approval
of Revised Financing Terms, on the approval of which the Reference Coal Tariff shall be revised.

As the primary use of coal extracted from Thar Coal Mining Projects is expected for the Power
Sector, TCEB shall ensure that the resulting Reference Coal Tariff leads to an economic fuel cost for
electricity generation, as compared to alternate sources of fuels, such as RFO, imported coal etc..

Determination of Reference Coal Tariff at the Contract Stage is mandatory for the Petitioner. Prior to
commencement of commercial operations of the Mining Project, the Reference Coal Tariff shall serve
as tariff applicable for sale prior to COD.

3.3 Commercial Operations Stage

Subsequent to achievement of COD, the Petitioner shall file a petition for updation of the Reference
Coal Tariff, leading up to the determination of Commercial Operations Coal Tariff.

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The TCEB shall determine reasonably justifiable deviations of the factors listed below on a case to
case basis, for cost implications differing from those determined at Contract Stage, and TCEB may
only allow such deviations as a pass-through at COD.

a. Variations on account of non-EPC costs incurred for village relocation and rehabilitation.
b. Insurance Cost (subject to the limits imposed in the Determination)
c. Operations and Maintenance Cost component, based upon a negotiated and signed contract,
as the Contract Stage Tariff is based upon budgeted estimates of such costs.

Where applicable, the Mining Project shall be subjected to the following adjustments at the time of
COD.

a. Financing Cost (change in relevant base interest rate, and timing and amount of Debt / Equity
draw-downs, subject to upper limits as set at the Contract Stage Tariff, etc
b. Foreign Currency Exchange fluctuations on Mining Project cost components denominated in
foreign currency
c. Inflation, using relevant benchmark or index approved by TCEB, however the adjustment shall
not be applicable on Insurance and Financing Costs
d. Royalty, as determined and notified by GoS from time to time

There will be no retrospective adjustments to the Project Cost or the corresponding equity
contribution after approval of the Commercial Operations Stage Tariff. There will be, however, true
ups on the operational expenditure pass-through items at the end of every MYT Period, to ensure
adjustments in over recovery and under recovery of justifiable costs incurred by the project.

Determination of the Commercial Operations Stage Tariff is mandatory, and the Commercial
Operations Coal Tariff shall serve as the tariff applicable during the first MYT Period.

3.4 MYT Periods

The equity base of the tariff determined at the Commercial Operations Stage shall be revised each
time the Petitioner undertakes capital expenditure (CAPEX) for either (a) expansion of production
capacity, or (b) production in accordance to a changed mine plan, provided however the Debt:Equity
ratios remain unchanged. In such cases, the Petitioner is allowed to file a petition with TCEB for a
revision in the Commercial Operations Stage Tariff, however the revised tariff shall come into force
after being subjected to a true up.

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Chapter 04 – Tariff Escalations & Indexations

Various components of the Coal Tariff are indexed in order to ensure the return on investment for
the Petitioner, thereby attracting investors and financing into the Coal Mining industry. All the Coal
Tariff components determined by the TCEB at Commercial Operations Stage, and subsequently for
each MYT Period, shall become the “Reference Tariff Components” for future adjustments due to
indexations and escalations. All the tariff calculations shall be made on the basis of the incentives
announced by TCEB, and any change in laws, duties, levies etc. which have not been assumed in the
calculation of the tariff shall be treated as a pass-through and the tariff shall be adjusted accordingly.

4.1 Operations & Maintenance (O&M) Cost

The following indexations shall apply to the O&M subcomponents in the non-exhaustive list below.
The indexations shall to each subcomponent on the basis of its share of costs.

Cost Component Applicable Indexation

Fixed O&M

Labour

Mining Labour Consumer Price Index

Dewatering Labour Consumer Price Index

Site General Facilities Labour Consumer Price Index

Water Treatment Labour Consumer Price Index

Accommodation & Amenities Labour Consumer Price Index

Power

Dewatering Power Electricity Tariff

Water Treatment Power Electricity Tariff

Others

Mining Other Consumer Price Index

Dewatering Repair & Maintenance Consumer Price Index

Dewatering Other Consumer Price Index

Stockyard Consumable Consumer Price Index

Stockyard Repair & Maintenance Consumer Price Index

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Site General Facilities Consumable Consumer Price Index

Site General Facilities Repair & Maintenance Consumer Price Index

Water Treatment Consumable Consumer Price Index

Accommodation & Amenities Consumable Consumer Price Index

Accommodation & Amenities Other Consumer Price Index

Variable O&M

Mining Diesel Diesel Price in Pakistan

Mining Lubes Global Crude Benchmark (Brent)

Mining Tyres PPI Tyres in US

Mining R&M PPI Construction Machinery & Equipment in US

a. Fixed O&M

The Fixed O&M component shall be quarterly indexed to each of the following.

i. x% of the Fixed O&M component shall be indexed to the Consumer Power Tariff, as
notified by the National Electric Power Regulatory Authority (NEPRA); and

ii. y% of the Fixed O&M component shall be indexed to the CPI, as notified by the Pakistan
Bureau of Statistics (PBS), or the relevant official authority for foreign cost component.

iii. a% of the Fixed O&M component, denominated in foreign currency, shall be indexed to
the applicable exchange rate, based on the revised TT & OD selling rate of the foreign
currency, as notified by the NBP.

The indexation of Fixed O&M shall be based on the following formula.

Power TariffAdj CPIAdj FXAdj
Fixed O&MAdj = O&MRef × [(𝑥% × ) + (𝑦% × )] × [𝑎% × ]
Power TariffRef CPIRef FXRef

Where

Fixed O&MAdj is the revised Fixed O&M component applicable for

the relevant quarter

O&MRef is the Reference O&M Tariff Component

CPIAdj is the revised CPI for the month prior to the month in
which indexation is applicable, issued by PBS

CPIRef is the CPI or equivalent index of the foreign country

for the month in which the Reference Tariff
Component was determined, issued by the relevant
official / government authority

Power TariffAdj is the revised Power Tariff of the power station

located at mine mouth from which electricity is
procured, issued by NEPRA a month prior to the
month in which indexation is applicable

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Power TariffRef is the Power Tariff of the power station located at

mine mouth from which electricity is procured,
issued by NEPRA in the month in which Reference
Tariff Component was determined

FX Adj is the revised TT & OD selling rate of the relevant

foreign currency as on the date on which the
indexation is applicable, as notified by the NBP
FX Ref is the TT & OD selling rate of the relevant foreign
currency as on the date on which the Reference
Tariff Component was determined, as notified by
the NBP

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b. Variable O&M

The Variable O&M component shall be quarterly indexed to each of the following.

i. w% of the Variable O&M shall be indexed to the cost of Diesel fuel in Pakistan, as
notified by the Oil & Gas Regulatory Authority (OGRA);

ii. x% of the Variable O&M shall be indexed to the Global Crude Benchmark (Brent), as
notified by NASDAQ;

iii. y% of the Variable O&M shall be indexed to the US PPI Tyres, as notified by the US
Bureau of Labour and Statistics (US BLS); and

iv. z% of the Variable O&M shall be indexed to the US PPI Machinery & Equipment, as
notified by the US Bureau of Labour and Statistics.

v. a% of the Variable O&M component, denominated in foreign currency, shall be indexed

to the applicable exchange rate, based on the revised TT & OD selling rate of the foreign
currency, as notified by the NBP.

The applicable formula shall be as follows.

CPIAdj DAdj CAdj TAdj MEAdj FXAdj
O&MAdj = O&MRef × [𝑣% × + 𝑤% × + 𝑥% × + 𝑦% × + 𝑧% × ] × [𝑎% × ]
CPIRef DRef CRef TRef MERef FXRef

Where

O&MAdj is the revised Variable O&M component applicable

for the relevant quarter

O&MRef is the Reference Variable O&M Tariff Component

CPIAdj is the revised CPI or equivalent index of the

foreign country for the month prior to the month
in which indexation is applicable, issued by the
relevant official / government authority
CPIRef is the CPI or equivalent index of the foreign
country for the month in which the Reference
Tariff Component was determined, issued by the
relevant official / government authority
DAdj is the revised cost of diesel fuel in Pakistan for the
month prior to the month in which indexation is
applicable, as notified by the OGRA

DRef is the cost of diesel fuel in Pakistan for the month in

which the Reference Tariff Component was
determined, as notified by the OGRA

CAdj is the revised Global Crude Benchmark (Brent) for

the month prior to the month in which indexation is
applicable, as notified by NASDAQ

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Thar Coal Pricing Framework

CRef is the Global Crude Benchmark for the month in

which the Reference Tariff Component was
determined, as notified by NASDAQ

TAdj is the revised PPI for Tyres in US for the month prior
to the month in which indexation is applicable, as
notified by US BLS

TRef is the PPI for Tyres in US for the month in which the
Reference Tariff Component was determined, as
notified by US BLS

MEAdj is the revised PPI for Construction Machinery &

Equipment in US for the month prior to the month in
which indexation is applicable, as notified by US BLS

MERef is the PPI for Construction Machinery & Equipment

in US for the month in which the Reference Tariff
Component was determined, as notified by US BLS

FX Adj is the revised TT & OD selling rate of the relevant

foreign currency as on the date on which the
indexation is applicable, as notified by the NBP
FX Ref is the TT & OD selling rate of the relevant foreign
currency as on the date on which the Reference
Tariff Component was determined, as notified by
the NBP

4.2 Working Capital Interest

The interest charge of the Working Capital Facility shall be adjusted on a quarterly basis as a result of
variation in the 1-Month KIBOR rate, as notified by the State Bank of Pakistan (SBP). The formula
applicable for the adjustment shall be as follows. Increase in interest charge resulting directly from
increase in amount of Working Capital on the basis determined by TCEB shall be allowed as a direct
pass-through expense.
Prod Pmt Adj CoalAdj DieselAdj CPIAdj × FXAdj KIBOR Adj + y%
WCAdj = WCx × (𝑎𝑥 + 𝑏𝑥 + 𝑐𝑥 + 𝑑𝑥 ) ×
Prod Pmt 𝑥 Coalx DieselRef CPIRef × FXRef KIBOR Ref + y%
Where

WCAdj is the revised Working Capital Interest component

applicable for the relevant quarter

Prod Pmt Adj is the adjusted Production Payment Tariff Component at

the time of indexation

Prod Pmt x is the Reference Production Payment Tariff Component

applicable in year x

CoalAdj is the adjusted Production Payment Tariff Component of

coal at the time of indexation

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Coalx is the Reference Production Payment Tariff Component of

coal applicable in year x

DieselAdj is the revised Cost of Diesel applicable in year x, as

notified by Oil & Gas Regulatory Authority
DieselRef is the reference Cost of Diesel prevailing for the month
in which Reference Tariff Component was determined,
as notified by Oil & Gas Regulatory Authority
CPIAdj is the revised CPI or equivalent index of the foreign
country for the month prior to the month in which
indexation is applicable, issued by the relevant official /
government authority
CPIRef is the CPI or equivalent index of the foreign country for
the month in which the Reference Tariff Component was
determined, issued by the relevant official / government
authority
FX Adj is the revised TT & OD selling rate of the relevant foreign
currency as on the date on which the indexation is
applicable, as notified by the NBP
FX Ref is the TT & OD selling rate of the relevant foreign
currency as on the date on which the Reference Tariff
Component was determined, as notified by the NBP
KIBOR Adj is the revised 1-Month KIBOR rate at the end of the one
month period prior to the month in which indexation is
applicable, as notified by the SBP
KIBOR Ref is the 1-Month KIBOR rate prevailing at the time of
determination of the Reference Tariff Component, as
notified by the SBP
y% is the component of the interest charge over and above
the KIBOR rate for the Working Capital Facility, as
approved and determined by TCEB at COD / Capacity
Enhancement Stage

4.3 Insurance Cost

Insurance Cost component of the Coal Tariff shall be indexed with the exchange rate of the relevant
currency, where procurement of a% of insurance is from foreign sources. The applicable formula for
quarterly adjustments shall be as follows.
FX Adj
Insurance Cost Adj = Insurance Cost Ref × 𝑎% ×
FX Ref
Where

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Insurance Cost Adj is the revised Insurance Cost component applicable for the
relevant quarter

Insurance Cost Ref is the Reference insurance Cost Tariff Component

FX Adj is the revised TT & OD selling rate of the relevant foreign

currency as on the date on which the indexation is
applicable, as notified by the NBP

FX Ref is the TT & OD selling rate of the relevant foreign currency

as on the date on which the Reference Tariff Component
was determined, as notified by the NBP

4.4 Equity Payments

Equity Payments (RoE) component of the Coal Tariff shall be quarterly indexed to the USD / PKR
exchange rate, based on the revised TT & OD selling rate of USD, as notified by the NBP. The
following formula shall apply.
FX USDAdj
Equity PaymentsAdj = Equity PaymentsRef ×
FX USDRef
Where

Equity PaymentsAdj is the revised Equity Payments (RoE) component applicable

for the relevant quarter

Equity PaymentsRef is the Reference Equity Payments Tariff Component

FX USDAdj is the revised TT & OD selling rate of PKR / USD as on the

date on which the indexation is applicable, as notified by
the NBP

FX USDRef is the TT & OD selling rate of PRK / USD as on the date on

which the Reference Tariff Component was determined, as
notified by the NBP

4.5 Debt Payments

Debt Payments component of the Coal Tariff shall be indexed biannually, or in line with the annual
repayment frequency, in the following manner.

a. Principal

The Reference Debt Principal Payments Tariff Component shall be biannually indexed to USD /
PKR exchange rate, based on the revised TT & OD selling rate of USD notified by the NBP,
where a% of the Debt Principal Payments are attributable to debt procured from foreign
sources. The applicable formula shall be as follows.

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FX USDAdj
Debt Principal PaymentsAdj = Debt Principal PaymentsRef × 𝑎% ×
FX USDRef
Where

Debt Principal PaymentsAdj is the revised Debt Principal Payments component

applicable for the relevant biannual period

Debt Principal PaymentsRef is the Reference Debt Principal Payments Tariff

Component

FX USDAdj is the revised TT & OD selling rate of PKR / USD as on

the date on which the indexation is applicable, as
notified by the NBP

FX USDRef is the TT & OD selling rate of PRK / USD as on the

date on which the Reference Tariff Component was
determined, as notified by the NBP

b. Interest (Local)

The Interest (Local) component of the Coal Tariff shall be adjusted on a biannual basis as a
result of variation in the 6-Month KIBOR rate, as notified by the SBP. The formula applicable
for the adjustment shall be as follows.
KIBOR Adj + Spread
Interest (Local)Adj = Interest (Local)Ref ×
KIBOR Ref + Spread
Where

Interest (Local)Adj is the revised Interest (Local) component of the Tariff

applicable for the relevant biannual period

Interest (Local)Ref is the Reference Interest (Local) Tariff Component

KIBOR Adj is the revised 6-Month KIBOR rate at the end of the
biannual period prior to the month in which
indexation is applicable, as notified by the SBP

KIBOR Ref is the 6-Month KIBOR rate prevailing at the time of

determination of the Reference Tariff Component, as
notified by the SBP

Spread is the component of the interest charge over and

above the KIBOR rate for the Debt Financing, as
approved and determined by TCEB at COD / Capacity
Enhancement Stage

c. Interest (Foreign)

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The Interest (Foreign) component of the Coal Tariff shall be adjusted on a biannual basis as a
result of variation in the 6-Month LIBOR rate, as notified by the relevant official / government
authority. The formula applicable for the adjustment shall be as follows.
LIBOR Adj + Spread FX USDAdj
Interest (Foreign)Adj = Interest (Foreign)Ref × ×
LIBOR Ref + Spread FX USDRef
Where

Interest (Foreign)Adj is the revised Interest (Foreign) component of the

Tariff applicable for the relevant biannual period

Interest (Foreign)Ref is the Reference Interest (Foreign) Tariff Component

LIBOR Adj is the revised 6-Month LIBOR rate at the end of the
biannual period prior to the month in which
indexation is applicable, as notified by the relevant
official / government authority

LIBOR Ref is the 6-Month LIBOR rate prevailing at the time of

determination of the Reference Tariff Component, as
notified by the relevant official / government
authority

Spread is the component of the interest charge over and

above the LIBOR rate for the Debt Financing, as
approved and determined by TCEB at COD / Capacity
Enhancement Stage

FX USDAdj is the revised TT & OD selling rate of PKR / USD as on

the date on which the indexation is applicable, as
notified by the NBP

FX USDRef is the TT & OD selling rate of PRK / USD as on the

date on which the Reference Tariff Component was
determined, as notified by the NBP

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