COMPARATIVE ANALYSIS OF BALANCE SHEET FUNDING AND PROJECT FINANCING AT NTPC

ABOUT THE COMPANY

NTPC Limited is the largest thermal power generating company of India.

It's a public sector company, and was incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India.

At present, Government of India holds 89.5% of the total equity shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public and others.

 The Company other business includes providing consultancy, project management and supervision, oil and gas exploration, power trading and coal mining.

 As of march 31, 2011, the Company was executing two projects: Tapovan Hydro Electric Project and Rammam Hydro Electric Project.

As of March 31, 2011, the Company had installed

capacity in India was 173626.4 mega-watts.

As of March 31, 2011, the Company had five subsidiaries: NTPC Electric Supply Company Limited, NTPC Vidyut Vyapar Nigam Limited, NTPC Hydro Limited, Kanti Bijlee Utpadan Nigam Limited and Bhartiya Rail Bijlee Company Limited.

It was conferred the status of “NAVRATNA” by GOL in 1997 which was raised to “MAHARATNA” in May, 2010.

COMPETETITORS’ OVERVIEW

Tata Power

Reliance Energy

CESC

Adani Power

Torrent Power

SWOT ANALYSIS OF NTPC

COMPETETIVE STRENGTH:

- Leadership position in the Indian power sector

- Strong cash flow

- Effective project implementation

- Sound customer relations and commercial performance

- High operational efficiency of coal-based stations

- Operational efficiency

- Long term agreements for coal and gas supply

- Strategic locations near fuel source

- Ability to turn around underperforming stations

- Strong balance sheet

- Emphasis on corporate governance

WEAKNESS:

- Depleting raw material

- Some plants have become old & need renovation & modernization

OPPORTUNITIES:

- Huge demand & supply gap

- Upcoming hydro & nuclear sector

- Huge opportunities in consultancy services

 THREATS:

- Rising prices of raw material

- Rising competition from private players like Reliance Energy, Tata Power etc.

NTPC FUTURE STRATEGY

Maintain market leadership

Improve their operating performance

Pursue fuel security

Diversified fuel mix

RESEARCH METHODOLOGY OBJECTIVE OF THE STUDY:- To study the relative benefits of appraising the thermal

project through balance sheet financing or financing via creating a special purpose entity & making comparative analysis on the basis of cost & benefits.

LIMITATION OF STUDY:- This study is done from the perspective of NTPC Ltd. only.- Generic Approach in case of Project Assumptions.

METHODOLOGY ADOPTED:- Data collection is purely Secondary.- The analysis has been carried out on the basis of Project

information, Assumptions & other necessary details given by NTPC.

ASSUMPTIONS Gross capacity of power plant is at 1000 MW(500 * 2) COD of unit I is assumed to occur after 56 months from the date of

main plant & unit –II is 6 months onwards (62 months after the contract)

Date of project cost has to be taken at 30 Nov 2016 Rupee term loan: equity ratio is assumed to be 70:30 Plant load factor is taken at 85 % Auxiliary consumption is assumed at 7 % of the gross energy

generated. Tariff has been taken as CERC (terms & conditions for determination

of tariff ) regulation prevalent currently(except escalation in tax & O & M cost)

Interest in case of debt under balance sheet financing - 11% Depreciation to be charged on the total cost assuming that total cost

(except land cost) incurred on plant to be phased out in equal proportion on both the units.

ROE & O & M expenses calculations of Unit I & II we take in equal proportions.

Interest in case of SPV route is- 12 % Repayment in case of balance sheet financing -8 years ( 4 yrs after

starting the project) Interest in case of working capital financing from bank is taken at

11.75 % Secondary fuel consumption is taken at 1 ml/Kwh Cost of coal = Rs. 850/1000 kg(primary fuel ) Cost of secondary fuel = Rs. 40/1000 ml with an annual escalation

of 0 %. O & M expenses has been assumed at 0.125 Cr/MW with an annual

escalation of 0 % Working capital requirements has been assumed as 1 month ;O& M

expenses ;spares =20 % of O & M expenses & coal cost & secondary fuel cost (2 months value taken)

Company act depreciation -5.28 %; subject to the asset being depreciated till 95 % of cost price.

CERC depreciation -5.28 % p.a. SLM for first 12 years & then spread evenly over the balanced life of the project.

The project life is assumed to be 25 years in line with the CERC guidelines prevalent currently.

CONCLUSION Balance Sheet Financing is the Favoured mode of

Financing for the Company due to following reasons:

- Long experience of the Company in Operation of Power plants

- Strong Balance Sheet

- Lower risk due to long term PPA which combines to allow the company to raise loans at significantly lower rates.

All these reasons helps to reduce the WACC of the company and it enjoys decent long term returns.