Comparative analysis of balance sheet funding and project in NTPC

1. COMPARATIVE ANALYSIS OF BALANCE
SHEET FUNDING AND PROJECT
FINANCING AT NTPC

2. 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.

3. 
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.

4. COMPETETITORS’ OVERVIEW

Tata Power

Reliance Energy

CESC

Adani Power

Torrent Power

5. 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

6. 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.

7. NTPC FUTURE STRATEGY

Maintain market leadership

Improve their operating performance

Pursue fuel security

Diversified fuel mix

8. 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.


9. ASSUMPTIONS

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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.

10. 
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.

11. 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.