1

SUMMER INTERNSHIP REPORT ON

FINANCIAL APPRAISAL OF A
THERMAL POWER PLANT
Abstract: Profitability analysis of a Thermal Plant under two modes of financing
highlight the advantage of Balance Sheet financing over the Project financing for
the company.

Author: CHITRA TOMAR

Lingaya’s University , Faridabad

07/31/2010
 TABLE OF CONTENTS
Table of Contents ….………………………………………………………………..... i

Letter of Authorization and Certification ….…………………………………………. ii

Acknowledgement ……………………………………………………………………. iii

Chapters -

1. Introduction
1.1 Corporate Profile of Company ……………………………………….. 7
1.2 Profile of New Project ………………………………………………… 7
1.3 Modes of Financing …………………………………………………... 7
1.4 Methodology of study ……………………………………………….... 7
1.5 Scope of study ………………………………………………………… 8
1.6 Limitation of study ……………………………………………………. 8
2. About NTPC Ltd.
a. Company overview …………………………………………………… 25
b. Company’s performance ……………………………………………... 26
c. Competitive Strength ………………………………………………… 30
d. Company’s Overall Strategy …………………………………………. 32
e. Other businesses ……………………………………………………… 37

3. Financing of projects
a. Different Modes of Project Finance ………………………………….. 39
b. Modes of financing used in the Project ………………………………. 41
c. Project Finance Sequence …………………………………………….. 44
d. Project Finance Credit Analysis ……………………………………… 45
e. Risks in Project Finance ……………………………………………… 47

4. Project work
a. Project assumptions ………………………………………………….. 49
b. Basis of Cost and Tariff Calculation .………………………………… 50
c. Preparation of Company Accounts ..………………………………… 51
d. Financial Indicators and Sensitivity analysis ……………………….. 52
e. Balance sheet financing and analysis ……………………………….. 53
f. Project financing and analysis ………………………………………. 55
5. Annexure
a. Assumptions for Project .…………………………………………….. 63
 AUTHORIZATION & CERTIFICATION

This Financial Appraisal Report is prepared for the presentation of work done during the
Summer Internship Program at NTPC Ltd and its content are on the basis that they will be held
for academic purpose only. The report has been prepared for the limited purpose of facilitating
understanding of the Financial Appraisal of a Thermal Power Plant of NTPC Ltd.

This report has been prepared by CHITRA TOMAR, undergoing Summer Internship Training,
on approval granted by NTPC Ltd at the request of Lingaya’s university, Faridabad. NTPC Ltd
permits the student to conduct study of various aspects of the topic and to learn & imbibe various
techniques and procedures of the work place.

The student is duly authorized by Mr. P. Tyagi, Senior Manager Finance (Budget), NTPC Ltd.,
to undertake the study and present them in the report. This report has been prepared on the basis
of the information and documents as furnished by the company. All projections and forecasts in
this report are based on assumptions considered to be reasonable and the actual outcomes may be
affected by changes in economic and other circumstances, which may not be foreseen.

This is to certify that the project report on “Financial Appraisal of a Thermal Power Plant” by
Chitra Tomar is original and has been done under my supervision. This report neither in full nor
in part has ever been submitted before for either this Institute or any other Institute. I am pleased
to say that her performance during the period was extremely satisfactory. The report is submitted
as partial fulfillment of the requirement of MBA program of Lingaya’s university,Faridabad

Mr. P. Tyagi
Senior Manager Finance
Budget Section
NTPC Ltd.
 ACKNOWLEDGEMENT
I would like to express my gratitude to all those who have been instrumental in the preparation of
my project report.

I am thankful to the organization NTPC Ltd. for providing me the opportunity to undertake this
internship study and allowing me to carry out my project.

I am deeply grateful to my company guide and mentor, Mr. Sunil Gulati, Manager Finance, at
(Budget) NTPC Ltd., who guided me to take this project and helped me bring it to conclusion. I
am thankful to him for his continuous support, advice and words of encouragement.

I extend my heartfelt gratitude to Mr. P. Tyagi, Senior Manager Finance (Budget) at NTPC,
Mr. P. K. Jha, Senior Manager Finance (Budget) at NTPC, Mr. Sarvesh Gupta, Senior
Finance Officer (Budget) at NTPC, Mr. V. K. Gupta, Senior Finance Officer (Budget) at NTPC
for their guidance and support throughout the internship.

My special thanks are due to Mr. R. Gobi, Senior Finance Officer (Budget) for his untiring
guidance in concepts, queries and eliminating doubts related to the project.

Lastly I wish to thank my family and my friends for their valuable support and understanding.

CHITRA TOMAR
MBA - 2009/11
Lingaya’s university,Faridabad
 Chapter 1: INTRODUCTION
1.1 CORPORATE PROFILE OF NTPC LTD

NTPC Ltd (“NTPC”) was incorporated on November 7, 1975 as National Thermal Power
Corporation Private Limited, a private limited company, wholly owned by the Government of
India. Subsequently, the company was converted into a ‘public limited’ company in September
1985 in line with GoI’s objective to help select Public Sector Enterprises (PSEs)establish
themselves as global giants. In July 1997, GoI identified certain PSEs including NTPC as
“Navratna” PSE and granted enhanced autonomy to their Board of Directors. This status in May
2010 has been further raised to “Maharatna”. Today, NTPC has emerged as an ‘Integrated Power
Major’, with a significant presence in the entire value chain of power generation business. It was
ranked 317th in the 2009, ‘Forbes Global 2000’ ranking of the World’s biggest companies.

NTPC has its aggregate installed generation capacity of 31,134 MW. The percentage
share of NTPC in the installed generation capacity of the country was 18.10% during 2009-10.
NTPC is pursuing an ambitious target of setting up an additional generation capacity to become
75GW plus company by 2017. In this direction, NTPC has been continuously exploring/
identifying new project sites, where green field projects could be set up. The following project
appraisal is a step in that direction.

1.2 PROFILE OF THE NEW PROJECT

The new project is envisaged by NTPC to be an addition to its existing installed capacity.
The Project has a proposed capacity of 500 MW. The construction of new project is to be
commenced on 1st April 2011. The project cost is estimated to be Rs. 3000 Crore including IDC.
NTPC plans to hold 30% equity stake in the project and rest 70% is to be financed by domestic
debt. The equity requirement is to be infused by the company itself and the debt requirement for
the project is proposed to be raised through domestic commercial borrowings/ Bonds.

The Project is being set up as a PPA based plant with long term power sell agreement. The
Commercial Operation Date (COD) of the plant is expected in 42 months from the date of start
of construction. The project life is estimated to be of 25 years.

1.3 MODES OF FINANCING FOR THE PROJECT

Two modes of financing for the proposed project have been considered for the appraisal. Balance
Sheet financing is available at a rate of 10% and Project financing at a rate of 12%. The two
modes differ in terms of security to the lender, interest rate applicable, loan moratorium periods,
and loan repayment periods for the company.
1.4 METHODOLOGY OF STUDY

The study undertaken follows the comparison of IRR of the project for each mode of
financing with the WACC of the project for the appraisal analysis. The profitability projection of
the plant is drawn for 25 years, with Tariff estimation, Profit & Loss account, and Balance sheet
and Cash Flow statement of the project.

Separate accounts for both the modes of financing are drawn. Final decision on the mode
of financing of the project is to be taken on comparing the Levelized Tariff under two modes of
financing.

1.5 SCOPE OF STUDY

The study provides a good framework, with some limitations, to analyze the process of appraisal
carried out by a generation company for making decision on financial viability of a plant. The
assumption used in the study, the process of Tariff estimation and IRR calculation is as per the
industry norms and provide a great insight into the domain of finance in Power Sector.

1.6 LIMITATIONS OF THE PROJECT

The study undertaken is from the perspective of NTPC Ltd only as a result of which the
interest rate applicable for financing is one which an established player like NTPC would only be
able to get. This study reinforces the use of Balance sheet financing for NTPC (because of its
balance sheet strength), which a new player in the industry would not be able to pursue. Other
limitation in the study is because of a generic approach taken by the author in case of project
assumptions that restricts its applicability to any specific case.
 Chapter 3: About NTPC Ltd.

1.1 COMPANY OVERVIEW

NTPC is the largest power generating company in India. As of March 31, 2009-10,
NTPC owned installed power generating capacity of 31,704 MW (including 2864 MW under
JVs). Of the owned capacity, 86.0% is coal-based, operated through 15 coal based power
stations, and 14.0% is gas-based, and operated through seven gas-based power stations
(including one naphtha-fired station).

As of March 31, 2010 NTPC has added 3,240 MW during the Eleventh Plan (2007-12),
and is presently engaged in construction activities for projects representing 17,930 MW
(including 4,000 MW undertaken by its joint venture companies). For the financial year ending
March 2010, generation increased by nearly 6%. Following charts shows generation over the
years in Billion Units.

NTPC COMPARED TO REST OF INDIA: INSTALLED CAPACITY AND GENERATION

NTPC also sustained its Market Leadership position in 2009-10. It contributed 28.6% of
total electricity generated in the country out of a total installed market share of 18.10%.
3.2 FINANCIAL PERFORMANCE 2009-10
NTPC had a provisional and un-audited Net Sales of Rs. 46,504.47 crore during 2009-10
as against Rs. 41,791.30 crore registering an increase of 11.28%. The provisional and un-audited
Gross Revenue is Rs.49, 478.86 crore during 2009-10 as against Rs.45, 272.76 crore for the year
2008-09, an increase of 9.29%.

Gross Revenue in Rs. Crore

60,000.00
49,478.90
50,000.00 45,272.80
40,017.70
40,000.00 35,380.70
29,339.30
30,000.00

20,000.00

10,000.00

0.00
2005-06 2006-07 2007-08 2008-09 2009-10

Provisional and un-audited Profit after tax for the year 2009-10 is Rs.8656.53 crore as
compared to Rs.8,201.30 crore during the year 2008-09, an increase of 5.55%.
 PROFIT (Rs. Crore)
10,000.00
9,000.00 8,656.50
8,201.30
8,000.00 7,414.80
6,864.70
7,000.00
6,000.00 5,820.20

5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
2005-06 2006-07 2007-08 2008-09 2009-10

Other Highlights for the year were-

 Third largest Market Capitalization of Rs.1, 70, 890 crore as on 31-03-2010.

 NTPC scrip continues to add to shareholders’ wealth and closed at Rs. 207.25 at the end
of the year at National Stock Exchange, 15.23% higher than last year.

 Declared an all time high interim dividend of Rs. 3/- per equity share having face value of
Rs. 10/- being 30% of paid-up capital translating into a dividend payout of Rs.2,473.64
crore.
FOLLOW-ON PUBLIC OFFER (FPO) - 412,273,220 equity shares of NTPC divested by Govt.
of India during the year. The proceeds of Rs. 8,480.10 crore credited to Government of India’s
account and refund orders amounting to Rs. 131.36 crore issued on February

 18/19, 2010. The Govt. of India’s shareholding in NTPC Ltd. reduced from 89.5% to
84.5% w.e.f. 18.02.2010.

 Some of the firsts associated with the issue were:

a. First mega issue in the calendar year 2010.

b. First ever public offering on “Fast Track Route” – eliminating the need to file Draft
Red Herring Prospectus thereby reducing the process time by 30 days.
c. First issue under “ Alternate Book Building Method” for pricing which achieved a
weighted average price of 205.69 per share for the book as against floor price of Rs.201 per
equity share.
 PERFORMANCE OVER THE LAST FEW YEARS FOR NTPC:

2010 2009 2008 2007 2006 2005 2004

Debt: Equity 0.60 0.61 0.52 0.51 0.45 0.41 0.44
Ratio
Interest 8.47 6.79 7.89 6.91 5.58 5.74 3.35
Coverage
Ratio
Asset Turnover 0.454 0.444 0.455 0.44 0.399 0.38 0.37
Current Ratio 2.865 2.894 3.22 3.158 2.56 1.914 1.67
Quick Ratio 2.554 2.59 2.885 2.8 2.18 1.65 1.46
EBITDA 33.14% 32.8% 38.31% 39.4% 37.66% 43.18% 59.86%
Margin
Net Profit 18.85% 19.57% 27.68% 21.07% 22.29% 25.77% 27.92%
Margin
Earning Power 12.43% 12.04% 14.8% 14.6% 11.87% 13.13% 17.97%
ROCE 8.3% 8.0% 9.9% 9.8% 7.9% 8.8% 12.0%
ROE 14% 14.3% 19.5% 14.1% 12.9% 13.9% 14.8%

KEY PERFORMANCE ANALYSIS OF LAST FEW YEARS:

Current Ratio: This has improved over the years for the company except for year 2009 and
2010. The reason has been increase in current assets as compared to current liabilities, which has
all of a sudden jumped in 2009. Compared to year 2008, spurt in current liabilities is 34% in
2009 and provisions growth continued at over 30% same as last 3 years. In 2010 the company
has managed to check its liabilities growth, has checked all its current asset growth except for
Sundry debtors

For the company, Cash and bank balances have grown from 6 thousand in year 2004 to 1
lakh 40 thousand plus in 2010!! Because of tripartite arrangement which helped the company
realize its earlier dues from SEBs.

Sundry debtors from 4 thousand to 66 thousand in the same time!! Debtors have gone up
because company has withdrawn early payment rebate of 18% which was proving to be costly.

Debt: Equity Ratio: This is expected to rise over the years for the company as it follows the
CERC norms for determination of tariff which proposes a debt: equity ratio of 70: 30 for every
project .

Interest Coverage Rate : Has improved over last five years except for year 2009, where due
to increased fuel cost the PBT has come down. Percentages are calculated without excluding the
financial charges which are rebates against early realization of dues.
 Asset Turnover :This is expected to remain constant due to the nature of tariff arrangement.

Profitability Ratio as percentage of sales: Fuel cost is a measure expense for the company.
Year 2009 and 2010 had increased fuel cost which was reason for drop in profitability for the
company. Year 2008 saw rise in employee cost due to 6th pay commission for central employees.
The other costs remain more or less constant meaning good operational efficiency for the
company.

Returns Ratio: Earning power of the company has been growing so has been the other ratio
like ROCE and ROE. Year 2009 and 2010 saw a decrease in these ratios because of drop in
profitability as a percentage of sales due to increased fuel prices.

Important from the growth perspective of the company - Debt: equity ratio to be low and
company has strong cash balance.

3.3 NTPC COMPETITIVE STRENGTHS

I believe the following to be the competitive strengths of NTPC Ltd:

Leadership position in the Indian power sector

 NTPC is the India's largest power generating company both in terms of installed capacity
and generated output. As of September 30, 2009, its owned, installed capacity is 28,350 MW
representing 18.6% of India's total installed capacity of approximately 152,360 MW. In Fiscal
2009, it generated 206.94 billion units of electricity, which represented 28.6% of India's total
electricity output of 723.79 billion units (Source: CEA).

Strong cash flow

As of September 30, 2009, its entire owned installed capacity of 28,350 MW is

contracted for sale through long term PPAs with SEBs and distribution companies. More than
90% of its sales of electricity are to SEBs and state owned distribution companies for which
payments are secured through LCs and the Tripartite Agreements. For private distribution
company customers, payments are secured through letters of credit backed by a first charge
created on their receivables in its favour.
Beyond 2016, its sales are secured through supplementary agreements with its customers
under which the customers have agreed to create a first charge on their own receivables in its
favour and in the event of a payment default assign such receivables into an escrow account. At
the time NTPC make investment decisions on new capacity or expansion of existing capacity,
NTPC typically enter into commitments from the SEBs and distribution companies for the
purchase of the output.

High operational efficiency of coal-based stations

NTPC’s coal-based stations run at high rates of efficiency, enabling it to sell power at
competitive prices and achieve savings. In Fiscal 2009, its coal-based stations achieved an
average PLF of 91.1%, which compares favourably to the national average of 77.2%. NTPC
coal-based stations also achieved an all time high average availability of 92.5% in Fiscal 2009. It
monitors its stations and projects through its real time monitoring system and systematically
maintains its stations to provide high availability. I believe that its monitoring and maintenance
techniques offer it a competitive advantage in an industry where reliability and maintenance
costs are a significant determinant of profitability.
Long term agreements for coal and gas supply

I believe that its long term fuel supply contracts help it to generate power at competitive prices
by allowing it to have greater predictability and better planning of fuel supplies. As of
September 30, 2009, NTPC signed long term coal supply agreements (“CSAs”) with coal
companies covering 12 of its 15 coal-based stations. The three other stations receive coal
lpursuant to coal supply linkages allocated to NTPC by the MoC while it negotiates CSAs for
them. NTPC has also entered into a series of agreements providing a committed supply of gas,
with several gas vendors, including long-term gas supply agreements covering six of it s gas-
based generation stations. From time to time, NTPC enters into arrangements to cover shortages
on a fall back/spot basis. NTPC has entered into a long-term fuel supply agreement to supply to
its liquid fuel-based station.

Strategic locations near fuel source

 Many of its stations are located in proximity to fuel sources. Over 86.0% of its total
generation capacity is coal based, and ten out of 15 of its coal-based stations, representing 83.0%
of its total coal-based capacity, are located in the range of seven to 80 kilometres from the coal
mines that supply them, for which NTPC has its own merry-go-round (MGR) rail system for
transporting coal from the coal mines to the generating stations. The strategic locations of its
coal-based stations and its MGR rail system enable it to reduce supply interruptions and lower
transportation cost. Supplies to the other five stations are provided through the national railway
system for which it receives the Railway’s consent at the time a linkage is allocated to NTPC. In
addition, all of its gas-based stations are located along major gas pipelines.

Effective project implementation

NTPC relies on its three-tiered project management system known as IPMCS (Integrated
Project Management Control System) which integrates its engineering management, contract
management and construction management control centres. The IPMCS addresses all stages of
project implementation from concept to commissioning. Further, NTPC has adopted online web
based monitoring for two projects and it intends to roll out the web based monitoring for all its
projects.
NTPC is also setting up a central project monitoring centre. It has substantially reduced
its average implementation time, which is the period between the award of the boiler, turbine and
generator (“BTG”) contracts and grid synchronization. Since 2000, the implementation time for
a majority of its 500 MW projects has been 37 to 42 months.

Strong balance sheet

NTPC has a strong balance sheet, which believe will help it to make investments required
for its growth plan, including borrowings for capital expenditures and investments in research
and development and business diversification. As of March 31, 2009, NTPC had a debt to equity
ratio of 0.6, a debt service coverage ratio of 3.7 and interest service coverage ratio of 10.2.
NTPC’S average cost of borrowings was 7.2% p.a. in Fiscal 2009. It generated net cash of Rs.
96,881 million in Fiscal 2009 from operating activities which provides it with flexibility to
implement its targeted plans. In addition, NTPC strong financial ratios and credit ratings
currently enable it to have ready access to domestic and international credit markets.
Government support
I believe that NTPC derives a strategic advantage from its strong relationship with the GoI. The
GoI is the promoter of the Company, and in each year NTPC enters into a memorandum of
understanding with the GoI providing for its annual performance targets. The GoI's support was
critical in securing the settlement of outstanding dues owed to it by the SEBs. The grant of
“Maharatna” status by the GoI provides NTPC with strategic and operational autonomy and
enhanced financial powers to take investment decisions without GoI approval
. 3.4 NTPC STRATEGY

NTPC’s corporate vision is to be “a world class integrated power major, powering India’s
growth, with increasing global presence.” NTPC believe that the following strategies will enable
it to achieve this vision.
Maintain market leadership

It intends to continue to rapidly increase its generating capacity to maintain and grow its
leadership position and remain as the largest Indian power generating company. It is currently
constructing additional capacity aggregating to 17,930 MW consisting of 45 units at 16
locations. It is also pursuing additional projects to enable it to become a 75,000 MW company by
Fiscal 2017. It has updated its contracting, engineering and other processes in order to enable it
to compress project implementation time.

Improve its operating performance

It has progressively improved its station efficiency through achieving higher station
availability, capacity utilization and lower heat rate. It intends to adopt technologically advanced
equipment, improved design and processes to remain an efficient operator.

Pursue its fuel security

NTPC believe that fuel security is critical to a power generation company such as their
Company and it intends to continue pursuing its fuel requirements by developing captive coal
mines both on its own and jointly with its joint venture partners. It has begun to develop its
Pakri-Barwadih coal mining project and beginning development activities in fits other coal
mining blocks. In addition, it has entered into a joint venture agreement with CIL for a company
to develop the Brahmini and Chichro-Patsimal coal blocks with geological reserves estimated to
be approximately two billion tonnes. It seeks to commence coal production by the end of Fiscal
2012. It is also focussing on acquiring stakes in coal mines abroad. It intends to pursue oil and
gas exploration, to ensure better control, greater security and reliability.

Diversify fuel mix

NTPC intends to diversify generation capacity. It is currently implementing 1,920 MW

hydroelectric projects, and has memorandums of understanding for developing wind, solar and
nuclear power stations. NTPC seeks to achieve a more diversified fuel mix, with approximately
70% from coal, 14% from gas, 12% from hydroelectric, 1% from other renewable sources, and
3% from nuclear by the end of Fiscal 2017.

Develop merchant power capabilities

NTPC intends to diversify its sales strategy by selling power on a merchant power
business. As provided by the National Electricity Policy, 2005, up to 15% of new generating
capacity may be sold outside long-term PPAs. In order to capitalize on the opportunity from the
sale of merchant power, NTPC is implementing 2,120 MW of power projects, comprising two
coal-based power projects of 1,000 MW and two hydroelectric-based power projects of 1,120
MW. This will enable it to sell a portion of its power generation at a market-based price although
some of the power generation from the merchant capacity may also be sold under PPAs.

Strengthen its diversified businesses

 NTPC plans to continue to make investments in its diversified businesses and further
strengthen its power trading business through NVVN. NTPC believes it has attractive growth
opportunities as the second largest power-trading company in India. it intends to enhance its
consulting services capabilities in the domestic and international markets and also focus on
electricity distribution business. It believes that these initiatives will open new avenues for
revenue and margin growth.

Adopt advanced technologies

NTPC has developed a long term technology roadmap for the induction of high
efficiency equipment, including supercritical and ultra-supercritical machines at its new plants.
The technological roadmap is intended to help it keep pace with global technical advances in
power generation. For its new coal-based stations, it has adopted state of the art, super-critical
steam parameters to improve the heat rate resulting in efficiency gain and the consequent
reduction in carbon dioxide emission. Its engineering team seeks to keep abreast of the latest
global technological developments in power sector and to assess the suitability of these
technologies for India. It currently has 5,280 MW supercritical capacities under construction, and
seeks to commission the first 800 MW ultra-supercritical operating station by Fiscal 2016.

Emphasize research and development

NTPC intends to continue applied research to improve the performance of its power
stations. NTPC intends to invest up to 1.0% of its annual profit after tax in research and
development initiatives and climate change related research. It has established NTPC Energy
Technology Research Alliance (“NETRA”), a state of the art centre for focusing on technologies
pertaining to climate change, economic power generation, networked research and providing a
complete spectrum of scientific services to enable its power stations to retain their technological
edge.

Sales of Electricity for the Company:

Each of NTPC stations has PPAs with its customers. As of March 31, 2010, the entire
output of its power stations has been contracted for under long-term PPAs. The GoI allocates the
capacity of each of its stations among the station's customers. Electricity is supplied to the
distribution companies and/or SEBs in accordance with the terms of the allocation letters issued
by the GoI. For its coal-based stations, the term of the PPA for most stations is 25 years, while
for its gas-based stations; the term of the PPA for most stations is 15 years. The term of the PPA
for its hydroelectric project which is under construction is 35 years. The terms are equal to the
expected useful lives of the stations. The actual lives of the stations are often longer, and, unless
the customer ceases to draw power, contracts continue in force until they are formally extended,
renewed or replaced. As part of its investment approval procedures, NTPC typically requires
PPAs to be in place for all new stations except for merchant power stations.

Historically, NTPC had significant problems recovering payments from the SEBs and the
distribution companies, which account for over 99% of its total sales. The OTSS eliminated these
problems, as the dues from the SEBs that were past due were securitized by the Tax Free Bonds.
All of its current billings to the SEBs are secured by Letters of Credits (LCs).

Under the Tripartite Agreements that were executed pursuant to the OTSS, each SEB was
required to establish LCs in its favour with commercial banks. The LCs are required to cover
105% of the average monthly billing for the preceding 12 months and are required to be
reviewed twice every fiscal year. If the LC for the required amount is not in place, NTPC has the
right to reduce the power supply to the concerned SEB by 2.5%. The SEBs are required to make
payment either through the LC or otherwise within 60 days after NTPC deliver the monthly
invoice. If payment is not made within 60 days, NTPC has the right to reduce power supply by
5% and if payment is not made within 75 days, NTPC has the right to reduce power supply by
10%. If payment is not made within 90 days, NTPC can further reduce power supply by 15% and
thereafter RBI will be required to pay the outstanding amounts to it from the relevant state's
account balance with the RBI.

The Tripartite Agreements provide that upon divestment of ownership or control of a

SEB or any of the entities resulting from the unbundling of a SEB, as applicable, in favour of any
entity not owned or controlled, directly or indirectly, by the applicable state government, the
Tripartite Agreement relating to the SEB or the unbundled entity, as applicable, will expire. In
such an event, the concerned unbundled entity will have to provide a payment security
mechanism acceptable to NTPC. In addition, dues owed to NTPC from another SEB, the
erstwhile Delhi Vidyut Board, were settled by a bipartite agreement with terms similar to the
Tripartite Agreement.

Beyond 2016, its sales are secured through supplementary agreements with its customers
under which the customers have agreed to create a first charge on their own receivables in its
favour and in the event of a payment default assign such receivables into an escrow account.

Fuel Supply for the Company:

Fuel represents its largest expense. Its primary fuels are coal, gas and naphtha and
approximately 86.0% of its current owned generating capacity is coal-based and 14.0% is
gas/naptha-based. NTPC has signed long term CSAs covering 12 of its 15 coal-based stations.
NTPC is also continuing to diversify its business to become an integrated power company. In
order to secure its fuel supply, NTPC has diversified into coal mining. NTPC has been awarded
eight coal mining blocks by the GoI, including two blocks awarded for development under a
joint venture with Coal India Limited.

Coal

NTPC purchases substantially its entire coal requirement from subsidiaries of CIL and
Singareni Collieries Company Limited (“SCCL”). As of September 30, 2009, NTPC has signed
long term CSAs covering 12 of its 15 coal-based stations. The three other stations receive coal
pursuant to coal supply linkages allocated to it by the MoC while NTPC negotiate CSAs for
them. The CSAs remain in force for a period of 20 years from the effective date except for power
stations with a remaining life less than 20 years, in which case the agreement is limited to the life
of the power station. The CSAs have a provision for a review at the end of every five years, in
respect of Annual Contracted Quantities (“ACQ”) and all other related provisions.

Each CSA addresses the quality and quantity of coal supply required for sustained
generation. There is also a provision to pay a performance incentive to the coal supplier on
delivery in excess of 90% of ACQ or a penalty on the failure to deliver the ACQ.

NTPC also sources imported coal through two public sector undertakings. During Fiscal
2009, imported coal comprised 4.2% of its total coal received. The pricing of coal for these
imports is linked to global indices. NTPC is also currently sourcing coal through e-auctions
conducted by the subsidiary coal companies of CIL. NTPC intends to continue to import coal to
meet the shortfall in the supply of coal from domestic sources.

Gas
NTPC sources gas domestically under an administered price and supply regime. During
Fiscal 2010, NTPC has executed gas supply agreements with GAIL for the supply of gas for its
gas-based power stations, which are valid up to 2021. As per the terms of these agreements, the
gas price is regulated under government pricing orders issued by the Ministry of Petroleum and
Natural Gas (“MoPNG”), from time to time. NTPC has entered into a long term agreement with
one of the private sector company for supply of gas from KG D6 basin based on allocation and
price approved by GoI for three of its gas based stations. NTPC is also sourcing gas and RLNG
from public and private sector companies on a spot, short and/or long term basis after obtaining
the prior consent of its customers for off-take of ener gy generated based on such fuel.

Coal Mining and Oil Exploration

At present, the overall demand for coal used in coal-based generating stations in India
exceeds production. Demand is expected to increase substantially in connection with planned
increases in coal-based capacity.
 NTPC has entered into coal mining to ensure better control, greater reliability and lower
cost of its coal supply. Coal mining is integral to its fuel security strategies. The MoC has
allotted six coal blocks to NTPC, which are: Pakri-Barwadih, Chatti-Bariatu, Kerandari,
Dulanga, Talaipalli and Chatti-Bariatu (South). NTPC expects coal from these coal blocks to
help in meeting its coal demand for its upcoming coal-based projects in the Eleventh and Twelfth
Plan periods and beyond. These blocks have estimated geological reserves of over three billion
tonnes. NTPC seek to commence coal production from these blocks during Fiscal 2012 and
which could result in a production level of up to 47 Million Tonnes Per Annum (MTPA) by
2017. The Pakri-Barwadih project is in the most advanced stage of development. NTPC has
received approval by the MoC of a mining plan and environmental clearance from MoEF. The
MoC has acquired 4,681 acres for this project. NTPC is also engaged in development active
activities at fits coal mining blocks. The MoC has approved mining plans for the Chatti-Bariatu,
Kerandari and Dulanga projects, and it is considering the mining plan for the Talaipalli project.

In addition, NTPC has recently signed a joint venture agreement with Coal India Limited
for the formation of a joint venture company which will develop and operate Brahmini and
Chichro-Patsimal coal blocks with geological reserves of around two billion tonnes to first meet
the requirement of Farakka and Kahalgaon expansion projects and thereafter if found feasible,
also consider power production.

In addition to enhancing and developing its own supplies, NTPC has formed International
Coal Ventures Private Ltd (“ICVL”), a joint venture company with Rashtriya Ispat Nigam
Limited (“RINL”), SAIL, CIL and NMDC for the acquisition and operation of coal mine blocks
abroad for securing coking and thermal coal supplies. In Fiscal 2007 NTPC formed NTPC SCCL
Global Ventures Private Limited, a joint venture with SCCL to undertake the development and
operation and maintenance of coal blocks and integrated coal based power projects in India and
abroad.

NTPC is also actively considering acquisition of stakes in coal mines and coal blocks in
other countries and NTPC has engaged consultants for conducting due diligence for some blocks
abroad. NTPC has also begun oil exploration work, in one of the petroleum blocks, awarded
under the New Exploration Licensing Policy V (“NELP”) to a consortium in which NTPC has a
40% interest in Arunachal Pradesh. Under the recently concluded NELP VIII round, the GoI
provisionally awarded NTPC one bloc k with a 100% interest and three blocks to separate
consortiums in which NTPC has 10% interest.

3.5 OTHER AREAS OF BUSINESS

Consulting and Other Services

 Its consultancy division provides various services to state generating companies, SEBs
and other private power companies, including engineering, procurement, quality assurance and
inspection, construction supervision, project management, commissioning, operation and
management, renovation and modernization, including gap analysis and performance
improvement plans.

In Fiscal 2009, its consultancy division earned total revenue of Rs. 1,325 million. NTPC
continues to expand its consultancy business and seek to leverage its experience in the power
sector to expand these operations in both India and abroad. NTPC believes that involvement in
consultancy projects abroad will give it exposure to international best practices in its industry
and in the new businesses NTPC may pursue.

Power Trading

NTPC believes the existence of regional imbalances and the adoption of availability
based tariffs may increase opportunities for power trading. NTPC is also engaged in power
trading through its wholly owned subsidiary, NVVN, which was incorporated in November
2002. In Fiscal 2009, NVVN traded 4,831 million units of electricity and transacted business
with more than 30 State utilities. In Fiscal 2009 NVVN had revenue of Rs. 19,799 million and a
profit after tax of Rs. 495 million. NVVN ranked second in India in Fiscal 2009 in power
trading.

NVVN also trades in ash and cenosphere in domestic and international markets, and it
has delivered 432 MT of cenosphere during Fiscal 2009. The GoI, as a part of Jawaharlal Nehru
National Solar Mission, has named NVVN as a Nodal Agency for the purchase of up to 1,000
MW solar powers from grid-connected solar power developers and sell after bundling an
equivalent MW capacity from its stations at rates notified by CERC. The GoI has also designated
NVVN as the Nodal Agency for cross-border trading of power from Bhutan, in addition to PTC.

In addition, NTPC is a promoter of, and currently own 4.08% of the paid-up capital of,
Power Trading Corporation of India Limited, which was the first power trading company in
India. In 2008, NTPC formed the NPEX with NHPC, Power Finance Corporation Limited
(“PFC”) and Tata Consultancy Services Limited for setting up a trading platform for various
power traders in India. This company has received in-principle approval from CERC for setting
up a power exchange.

Electricity Distribution
Its Subsidiary, NTPC Electric Supply Company Limited (“NESCL”), which NTPC
formed in August 2002, is pursuing an electricity distribution business. NESCL is involved in the
GoI’s rural electrification program in 30 districts and five states and has implemented
electrification of 4107 villages during Fiscal 2009.
In the past, NESCL acted as the “Advisor-cum-Consultant” for the MoP for
implementation of schemes under the APDRP. NESCL is also participating in the distribution
infrastructural development programme under consultancy assignments. NESCL recently formed
a joint venture with Kerala Industrial Infrastructure Development Corporation (“KINFRA”), to
pursue the retail distribution of power in various industrial parks developed by KINFRA in
Kerala and SEZs and industrial areas. In Fiscal 2009, NESCL generated gross income and profits
after tax of Rs. 785 million and Rs. 185 million, respectively.

Equipment Manufacturing Through Joint Ventures

NTPC has also formed joint ventures for the manufacture of equipment used in the power
business. The details of the companies are as follows:

NTPC formed NTPC BHEL Power Projects Pvt. Ltd. (“NTPC BHEL”), a joint venture
with BHEL in Fiscal 2008 for carrying out engineering procurement and construction (“EPC”)
activities in the power sector, and to engage in the manufacture and supply of equipment for
power stations and other infrastructure projects in India and abroad.

NTPC formed BF-NTPC Energy Systems Limited (“BF-NTPC Energy”), a joint venture
with Bharat Forge Limited, in June 2008 to establish a facility to take up manufacturing of
castings, forgings, fittings and high pressure piping required for power projects and other
industries and BOP equipment for the power sector.

NTPC has acquired a 44.6% stake in Transformers and Electricals Kerala Limited
(“TELK”), through which NTPC intends to manufacture and repair high voltage transformers
and associated equipment. NTPC believes this venture will enable us to meet the requirements of
its own stations, and also service the very large ageing fleet of transformers in the country.

These are some of the highlights of a company which was incorporated on

November 7, 1975 as a thermal power generating company with the objective of
complementing state initiatives in the development of thermal power generation in
the country. NTPC has implemented a series of initiatives designed to provide
itself with a superior industry position. NTPC was conferred the status of
“Navratna” by the GoI in 1997, which granted it operational and financial
autonomy. This status was raised in May, 2010 to “Maharatna” status.

Chapter 4: FINANCING OF POWER PROJECT

4.1 Different Modes of Project Finance:

There are in general the following avenues of financing of Projects available to a company.
1. Government Grants
2. Debt financing
3. Equity financing
4. Third party financing and
5. Project financing

1. Outright grant programs from the government – the advantage to receiving such funding
is the reduced project cost. The disadvantages are the time and effort it takes to apply for
and receive funding monies.

2. Debt financing – the biggest advantage of debt financing is the ability to use other
people’s money without giving up ownership control. The biggest disadvantage is the
difficulty in obtaining funding for the project. Bankers and lenders examine the expected
financial performance of a project and other underlying factors of project success. These
factors include contracts, project participants, equity stake, permits, technology, and
sometimes market factors. A good borrower should have most, if not all, of the
following:
a) Signed interconnection agreement with local electric utility company
b) Fixed price agreement for construction
c) Equity commitment
d) Environmental permits
e) Any local permits/approval
Lenders may also place additional requirements on project developers or owners.
Requirements include maintaining a certain minimum debt coverage ratio and
making regular contributions to an equipment maintenance account, which will be
used to fund major equipment overhauls when necessary. Transactions costs for
arranging debt financing are relatively high, owing to the lender’s due diligence
(i.e. financial and risk investigation) requirements.
3. Equity financing – equity is more expensive than debt, because the equity investor
accepts more risk than the debt lender. This is because debt lenders usually require that
they be paid from project earnings before they are distributed to equity investors. Thus
the cost of financing with equity is usually significantly higher than financing with debt.
Equity finance can also have two methods: self and investor. The primary advantage of
this method is its availability to most projects; the primary disadvantage is its high cost.
The equity investor’s due diligence analysis typically includes a review of contracts,
project participants, equity commitments, permitting status, technology and market
factors.
4. Third-party financing – with each of the following methods, the project sponsor gives up
some of the project’s economic benefits in exchange for a third-party becoming
responsible for raising funds, project implementation, system operation, or a combination
 of these activities. Some of the disadvantages of third party financing include accounting
and liability complexities, as well as the possible loss of tax benefits by the owner.

Lease financing – lease financing encompasses several categories in which an owner leases all or
part of the project’s assets from the asset owner(s). Typically, lease arrangements provide the
advantage of transferring tax benefits such as accelerated depreciation or energy tax credits to an
entity that can best use them. Lease arrangements commonly provide the lessee with the option,
at pre-determined intervals, to purchase the assets or extend the lease. Several large equipment
vendors have subsidiaries that lease equipment, as do some financing companies. There are
several variations on the lease concept including:

a) Leveraged lease. In a leveraged lease, the equipment user leases the equipment from the
owner, who finances the equipment purchase with extended debt and/or equity.
b) Sales-Leaseback. In a sales-leaseback, the equipment user buys the equipment, and then
sells it back to a corporation, which then leases it back to the user under contract.
c) Project Financing – “Project Finance” is a method for obtaining commercial debt
financing for construction of a facility. Lenders look at the credit-worthiness of the
facility to ensure debt repayment rather than at the assets of the developer/sponsor.
Project finance transactions are costly and often an onerous process of satisfying
lender’s criteria. The biggest advantage of project finance is the ability to use others’
funds for financing, without giving up ownership control. The biggest disadvantage is
the difficulty of obtaining project finance.

Capital Cost Effect of Financing Alternatives:

Each financing method produces a different weighted cost of capital. Interest rates are an
important determinant of project cost if the owner decides to borrow funds to finance the project.
Rates are determined by the prevailing rate indicators at a particular time, as well as by the
project and lender’s risk profiles. Among the five main financing methods presented above, the
ranking from lowest cost to highest cost is as follows:

1) Grants
2) Debt financing
3) Lease financing
4) Project financing
5) Private equity financing

4.2 Types of Financing Used Here:

a) Balance sheet financing

 The Balance sheet financing is generally characterized by claims by the lender on all
revenue sources of the company. It offers full recourse and security to the lender in case of a
default. The amount of financing is capitalized in the balance sheet by the lender.

b) Project financing

The Project financing is generally characterized by claims for the lender on specific
revenue sources of the project sponsors. It is non-recourse with illiquid or short lived security.
Project financing may be carried out through traditional bank loan or securities offering.

DETAIL OF FINANCING

a) Balance-Sheet Financing (Recourse Financing)

Balance sheet financing is also known as traditional mode of financing. This option is
often used for shorter, less capital-intensive projects. However companies avoid this option, as it
strains their balance sheets and capacity, and limits their potential participation in future projects.
The following chart illustrates the structure of a water treatment project in which the private
sector company uses its own credit (balance sheet strength) for raising the funds.

Basic transaction in a corporate finance mechanism

Illustration 4.2 (Version 1 – National Treasury/PPP Manual)
Source: Version 1 – National Treasury/PPP Manual. Introductory Manual on Project Finance
Figure 1

A multi project company (like NTPC) can very well go with this kind of financing as the
funds obtained from banks/FI can be invested in any project and not necessarily in any one
specific project unlike in the case of project financing. This will give company the freedom to
maximize the return on the loan amount taken by investing in many projects or any other area.
The money lender is also happy in this case as he need not worry about the risk of non-
repayment since the sponsor company will be liable to repay the money so the money lender can
enjoy the debt given to the company in the form of interest rate.
 2. Project Financing

This is a mode of financing of an economic unit in which a lender is satisfied to first look into
the cash flows and earning of that unit as the source of funds from where their loan amount
would be repaid and to the assets as a collateral for the loan. The key to successful project
financing is structuring the finance with as little recourse as possible to the sponsor, at the same
time providing sufficient credit support through credit guarantees or undertakings of the sponsor
or the third party, so that lenders will be satisfied with the credit risk.

When project financing is done the assets of that project are separated from that of the
sponsor. Project financing uses the project’s assets and/or future revenues as the basis for raising
funds. Generally, the sponsors create a special purpose vehicle, legally independent company, in
which they are the principal shareholders. The newly created company usually has the minimum
equity required to issue debt at a reasonable cost, with equity generally averaging between 30
and 40 per cent of the total capital required for the project. Individual sponsors often hold a
sufficiently small share of the new company’s equity, to ensure that it cannot be construed as a
subsidiary for legal and accounting purposes. The final legal structure of each independent
project is different. The following chart illustrates a simple project finance example:

Illustration 4.3 (Version 1 – National Treasury/PPP Manual)

Source: Version 1 – National Treasury/PPP Manual. Introductory Manual on Project Finance
Figure 2

The above structure shows that the legal vehicle (Project Company) frequently has more than
one sponsor, generally because:

• The project exceeds the financial or technical capabilities of one sponsor

• The risks associated with the project have to be shared
• A larger project achieves economies of scale that several smaller projects will not achieve
• The sponsors complement each other in terms of capability
.The process requires or encourages a joint venture with certain interests (e.g. local participation
or empowerment)
• The legal and accounting rules stipulate a maximum equity position by a sponsor, above which
the project company will be considered a subsidiary.

Project financing in emerging markets has been in use for some time, primarily for financing
large new projects without any prior track record or operating history — green field projects. It
facilitates attracting new investments by structuring the financing around the project's own
operating cash flow and assets, without the additional guarantees of sponsors.

Project financing is commonly described as an exercise in risk allocation and risk

mitigation. Indeed, parties to project financing often prepare risk allocation matrixes during the
structuring stage of project financing to ensure risks are properly allocated amongst the parties.
Specific type of project agreement which forms the basis for project financing (such as a
production sharing agreement, concession agreement, power purchase agreement or other form
of off-take agreement, etc.) presents unique risks which must be allocated amongst the project
lenders, sponsors and project company parties to the project financing.

There are two basic types of project financing: limited recourse project financing and
nonrecourse project financing. Limited recourse gives the lenders some recourse to the sponsors
in the form of the pre-completion guarantee or/and other assurances of some form of support for
the project. Limited recourse project financing is typical for emerging market projects and
projects posing significant risks. Nonrecourse project financing is an arrangement under which
lenders do not have any direct recourse to the sponsors. Their security includes various assets of
the project company (including the assets being financed) and relies on the operating cash flow
generated by the project company.

4.3 PROJECT FINANCE SEQUENCE

The project finance sequence usually begins with a Feasibility Study that covers all of the
aspects of the project:

 Assess existing conditions (baseline conditions).

 Develop alternatives to the project as planned.

 Develop an environmental overview and impact.

 Map and survey of the topography of the project location (major natural features, land
use, watersheds, existing access).

 Identify government agencies that will be involved and must provide authorization
/certification.

 Assess the cost and details of the construction phase of the project.

 Assess the cash flow generated by the operation of the project.

 Accurately measure the cost of inputs to construct and operate the project.

 Accurately measure the demand / price for the product(s) or service of the project.

 The study must also cover many details, everything from whether the soil can support a
large structure, is it located in a hurricane, flood or earthquake zone, is there sufficient
skilled labour among local residents or will outsiders be able to afford to live there; the
report has to consider all issues that will make the project a success.

 In completing the project a set of problems will be solved but what new problems are
created and how will they be solved?

 Recommend improvements where necessary.

4.4 PROJECT FINANCE CREDIT ANALYSIS

The credit analysis is rather time consuming as one must analyze the:

 Project feasibility study

 Sponsor(s)
 Joint-ownership structure of the project
 Project supervisor
 Contracts regarding construction, supply, off-take, maintenance and concession
agreements
 Contractors and Subcontractors and any performance surety bond(s)
 Supplier (for instance, gas or coal delivery to a power plant)
 Potential customers for the project's services once completed or the Off-taker, which is
entity that commits to purchase the project output under a long-term purchase (or off-
take) agreement.

The feasibility study must be looked at very carefully not just for accuracy but because
some parties already tend to be predisposed to a specific location, design or outcome and may
influence, directly or indirectly, the recommendations of the study.

The lenders must decide how much of the project to actually finance, which will be the
debt-to-total capitalization ratio of the corporate entity that owns the project. The leverage could
be as high as 70%. However, a project's borrowing capacity should be based on the cash flow
projections of the infrastructure once in operation. Lenders have to borrow the funds to lend to
the project, a portion of which may be short-term, thus the timing and certainty of project cash
flows is important for the lenders to manage their own balance sheet liabilities.

Due to the non-recourse clause (in case of Project financing) it means that the lender(s)
have exposure to a project-specific / asset-specific credit risk. The risk can be controlled either
by:

 purchasing a credit derivative in the capital markets

 entering into a public-private partnership (PPP) with the host government
 obtaining an credit agency guarantee (which may result in lengthening the maturity of the
loan)
 securitizing the loan
Once the project is operating the lender(s) may also have to enter into a currency
derivative product to cover any fluctuations in the value of the local currency cash flow.

Certain Questions that Lender find important are:

1. Does the feasibility study accurately represent the cost of construction and accurately
project the cash flow from operations? What has changed since the date of the feasibility
study and are the assumptions utilized in the study still viable?

2. Have the prices of inputs or outputs been estimated correctly? What sort of expansion /
contraction of prices and demand can the project survive and still be viable?
 3. What is the level of experience of the sponsors and what is the level of experience of the
operator of the facilities? Although there may be no recourse to the sponsors,the credit
Worthiness and financial strength and stability must be evident and clearly demonstrated
to indicate that they have the means to see the project through.

4. . Do the lenders have a competent, third-party auditor who can monitor the project on-
site, advise them that specific construction phases have been completed, and that
reporting obligations are being met by the sponsor so that the next scheduled drawdown
funding phase can be authorized and released? Will the third-party auditor also issue a
certificate and assume some liability for an inaccurate assessment?

5. Have any budget / cost increases or construction delays increased the original amount of
the loan or resulted in a delay in the scheduled loan repayment? Will supplier and/or off-
take contracts have to be renegotiated due to a delay in the completion of the project?

6. Is there proper control over the management of the project so that they will not use the
free cash flows generated by the project operation for opportunistic or inefficient
investments?

7. Is there a local supply of skilled labour to operate and maintain the facilities? Will labour
be members of a union that can offer collective bargaining and will there be defined
benefit pension / postretirement benefit plan requirements?

8. Does the project have a credit concentration in its off-take agreement (single customer or
just 2 or 3 large customers) or is it mitigated by a long-term, enforceable contract?

9. Will / does the project have the right to sell excess capacity during periods when it is not
needed to meet contractual wholesale / retail requirements?

10. What type of insurance, or self-insurance, is available for the operating entity's casualty
and property exposures?
11. Are the cash streams in a foreign currency, supplies denominated in a foreign currency or
commodity inputs accurately hedged by specific derivative products / contracts?

4.5 RISKS INVOLVED IN PROJECT FINANCE

 There are several risks involved with the total project and some occur during the
construction phase of the project and some occur after the completion of the project during the
operation phase. Thus, the project risks tend to diminish as the project reaches various points of
completion.

Construction Completion Risk

 This is the basic risk that for some reason the project is never completed.
 If the lender(s) have already released funds for the land acquisition and initial start-up of
construction but the borrower / project developer does not commence construction then
the lender may have to foreclose on raw or only partially improved land that does not
have sufficient value to cover the initial release of funding.
 If a certain amount of funding is released and the project developer becomes insolvent or
there is some type of problem that halts the project then the lender may have to foreclose
on assets / infrastructure that is incomplete and not of sufficient value to recover all or a
partial amount of funding from the borrower.
 The assets may be very highly specialised and possibly located in a remote area. Because
the assets are project specific they may have not have any value (other than scrap) outside
of the project itself.
 The lenders may have to hire a new company to come in and complete the project and
provide additional funding to that new developer, and may have to renegotiate off-take
contracts due to perceived problems connected to the project.
 Completion risk considers all risks and factors: problems with suppliers during
construction, natural conditions and weather, political and force majeure, environmental
regulation, labour and technical / construction issues.

Technical Risk
 This risk occurs during the construction (and design) phase of the project.
 Is the project design or concept itself, or the fuel source or the output of the project of a
new type or design that has not been tried before?
 Has the project been designed correctly and took advantage of, or anticipated, any
changes in technology so that the facility operates at its highest capacity?
 If changes in technology are not contemplated then the facility may function at lower
capacity or be unable to provide a product or service that is in demand.
 The facility may operate in a manner that violates local environmental regulations.
 Will it be difficult to move construction supplies, machinery and labour to the site or is it
located in an extreme environment? Is there any special training required for the hired
labour to construct or operate the facility?
Environmental Risk
 This risk occurs during both the construction and operation phases of the project.
 There is a possibility that a spill of some material during construction could contaminate
the immediate ecosystem in which the project is located.

 There is the possibility that a spill of some material during operation (for instance, fuel
delivery) could contaminate the immediate ecosystem in which the project is located.
 There is the possibility that the operation of the facility may be in violation of
environmental regulations (for instance CO2 emissions).
Economic / Market Risk
 This risk occurs during the operational phase of the project.
 The actual amount realized from the project cash flow can be affected and impacted by
inflation, interest rates, exchange rates, labour costs and prices for the inputs and output
of the project. For instance, there is the possibility that the cost of inputs (fuel) have
substantially increased since the inception of the project. Similarly, there may too few
passengers for a rail line or toll road, or inadequate reserves for a mine.
 Do the currencies of the sales contracts match with the currencies of supply contracts?
 Is there a history of labour disputes that may result in work stoppages or excessive wage
increases?

Political / Sovereign Risk

 This risk occurs during both the construction and operation phases of the project,
particularly in developing countries / emerging markets.
 Expropriation by the host nation
 Currency convertibility and transferability
 Political violence / terrorism
 Unanticipated changes in regulations or the failure by the government to implement tariff
adjustments (critical to power projects) because of political considerations
 Government licenses and approvals required to construct or operate the project are not
issued
 Project operation is subject to state-owned suppliers or customers
 Taxation and royalty payments are unilaterally increased

Chapter 5: REPORT ON PROJECT

5.1 Assumption taken in Project:

The company, NTPC Ltd desires to come up with a new coal based thermal power plant
of 500 MW installed capacity. For this the company wants to analyze the Profitability of the
Project using two different modes of financing having different rate of interest for the term loan
and different repayment periods. The Debt: Equity ratio in both the cases is assumed to be 70:30.
The Plant is conceived as a pit head coal based thermal power plant with a capacity of 500 MW.
It is expected to be set up as a PPA based power plant and will follow CERC regulations for
tariff determination. Some of the major assumptions for the two modes of financing are as stated
below.

HEADS PARTICULARS
Project construction start date 01-04-2011
Project construction completion date 30-09-2014
Time period of construction 42 Months
Project life 25 Years
Cost of construction Per MW Rs. 6 Crore per MW
Planned Project Cost including IDC Rs. 3000 Crore
Land Cost Rs. 50 Crore
Fuel Coal
Plant Load Factor (PLF) 85%
Gross Calorific Value of Coal 3000 kcal / kg
Station Heat Rate 2400 kcal / Kwhr
Secondary Fuel Consumption 1 ml / Kwhr
Gross Calorific Value of Secondary fuel 10 kcal / ml
Coal Cost (Base Rate) Rs. 850 per tonne
Secondary Fuel Cost Rs. 40 per litre
Auxiliary Consumption 7%
O&M expenses Rs. 18.2 Lakh per MW
Loan Drawl pattern 1st Year 15%
2nd Year 32%
3rd Year 28%
4th Year 18%
5th year 7%
Depreciation rate 5.28%
Interest on Working Capital 11.75%

Detailed assumptions underlying the financial projections are given in Annexure.

The planned cost of construction of the plant is assumed to include the IDC part but not
the Working Capital Margin. Separate loan is taken for the same. Interest on the same is assumed
at a rate of 11.75%. No escalation of O&M expenses is assumed and inflation has no role in
project appraisal. Standard rates of Depreciation apply to the project.
5.2 Basis of Costs and Tariff Calculation

The applicable tariff for the proposed plant shall be as per CERC Regulations as applicable
from time to time. The tariff norms provide for recovery of Annual Fixed Capacity Charges
consisting of the following components:
 Return on Equity
 Depreciation
 Interest on Term Loans
 Interest on Working Capital Loans
 O&M charges
 Cost of secondary fuel
The Variable charges would essentially include Primary fuel (Coal) charges and fuel
price adjustments such as escalation etc.

CALCULATION IN PROJECT:

The Cost for the company is divided into two heads viz. A) Energy Charge which is Variable
Cost and has only the Primary Fuel cost under it, and B) Capacity Charge which is fixed part.
The individual heads under the two categories are discussed below

1. FUEL COST-
The formula used for fuel cost calculation is as given by CERC Regulation which takes
into consideration the Auxiliary consumption of the company. The Cost of Coal is
assumed to be Rs. 850 per Tonne. The cost of Primary Fuel is Variable Cost for the
company and is termed as Energy Charge in the industry. The cost of Secondary Fuel is
also calculated as per the formula given and features in the Capacity Charge for the
company.
2. DEPRECIATION-
The depreciation used in the Tariff calculation is at a rate of 5.28% for the first 13 years
and the remaining is at a rate which distributes the remaining depreciable amount over
the remaining life of the plant. The maximum allowable depreciation as per CERC
regulation for the tariff calculation is 90%.
The depreciation in company’s account is up to 95% of the Gross Block and at a rate of
5.28% allowed for the industry.
The depreciation for the Income Tax calculation is as per WDV method.

3. RETURN ON EQUITY
The latest regulation as per CERC allows ROE for a generation company to be at 15.5%
post tax plus an additional 0.5% for plants completed within the time line specified for
the projects. The ROE calculation in the sheet is at 16% grossed to pre-tax rate.
 4. OPERATION AND MAINTENANCE-
O&M expense for the company is calculated for the entire life of the project at a value of
Rs. 18.2 Lakh/MW with no escalation.

5. WORKING CAPITAL-
The Working Capital for the company comprise of 5 heads viz. O&M expense (for 1
month), Maintenance Spares (equal to 20% of Annual O&M expense), Coal Cost (for 2
months), Secondary Fuel cost (for 2 months), and Receivable (equal to 2 months of
Capacity and Energy Charge). The company plans to take a separate loan for meeting its
working capital requirement.

6. INTEREST ON WORKING CAPITAL-

The interest in working capital is calculated at the rate of 11.75% p.a.

7. TERM LOAN-
The company envisages two different modes of financing for this plant viz. Balance sheet
financing at a rate of 10% and Project Financing at a rate of 12%. The calculation of Term
Loan interest and Repayment is different for the Revenue side (as per CERC guidelines
for tariff calculation) and Actual side (in the Company accounts). The different treatment
is done to even out the repayment cost of Term Loan as far as possible.

8. TARIFF-
The annual tariff for the plant is calculated by adding all the cost heads and dividing this
figure by the total units sold for the year.

5.3 PREPARATION OF COMPANY ACCOUNTS

1. SALES
The sales figure in Profit and loss account is calculated by multiplying the Tariff for the
year with the units sold in that year.

2. PROFIT AND LOSS ACCOUNT

This account preparation is as per the costs calculated above except for depreciation
charged in it which is as per the Company’s Act and the interest on Term Loan which is
as per the Actual Repayment calculation.

3. BALANCE SHEET
The Balance Sheet for the plant is calculated since the start of construction period till the
plant life. The assets under construction are kept under the head of CWIP for the
construction period and transferred to Gross Block at completion of construction. Debt
 figures are reduced during the commercial operation year by the amount repaid in that
year. All other account preparation is as per standard norms.

4. CASH FLOW AND IRR

Cash flow statement is prepared as per the standard norm. IRR for the project is
calculated using Capex less Interest During Construction (IDC) and Cash Flow for the
company after Tax less the depreciation charged on IDC. Comparison is made of IRR
with the WACC for the project.

5.4 FINANCIAL INDICATORS and SENSITIVITY ANALYSIS:

Important indicators such as Debt: Equity ratio, Debt service coverage ratio (DSCR) for the
project is calculated and the Maximum, Minimum and average figures are tabulated. It may be
reiterated that the projections take CERC norms as the base. Any upsides in profitability
obtained due to sale under competitive bidding route have not been taken into account in the base
case.

Towards assessing the robustness of the project, in the event the Project experiencing
changes in one or more project parameters, sensitivity analysis has been carried out for certain
scenarios like changes in Project Cost, changes in Fuel Cost, changes in Receivables and changes
in O&M expenses. The resulting change in IRR, DSCR and Levelized Tariff is also tabulated.
These calculations are separately done for both the two modes of financing.

The tables for Financial Indicators and Sensitivity Analysis are given along with each mode
of financing.

5.5 BALANCE SHEET FINANCING

Project highlights:
 The financing for the project is Balance-Sheet financing. The rate of interest for the term
loan is assumed to be 10%. The overall debt-equity ratio proposed is 70:30. Equity will be
financed from internal resources of NTPC whereas the debt portion is proposed to be financed
from Domestic commercial borrowings/bonds. The loan moratorium period is negotiated with
the lenders to be 5 years and the repayment period is 7 years. The commercial operation date
(COD) is envisaged in 56 months from the date of start of construction.

Cost estimate and financial analysis:

Cost of Project excluding IDC 2702.6 Crores

IDC 297.4 Crores
Cost of Project including IDC 3000 Crores
Working Capital Margin Not considered in capex
Cost of Project excluding IDC & WCM 2702.6 Crores
Cost per MW excluding IDC & WCM Rs. 5.41 Crore/MW
Cost per MW including IDC & WCM Rs. 6 Crore/MW
DETAILS OF TARIFF CALCULATION

The company for the above Plant calculates Tariff as per CERC guidelines and above
mentioned assumptions along with those which are common to both the modes of financing. The
company follows all regulations to the letter, details of CERC regulations are annexed to this
report. The company prepares the following accounts viz. Profit & Loss, Balance Sheet, Cash
Flow and IRR, Sensitivity Analysis of the project for the Balance sheet financing. The following
table summarizes the major findings of the calculation. The detailed calculation is annexed to
this report.

KEY INDICATORS CURRENT COST

Project IRR 12.09%
WACC 9.47%
Levelized Tariff Rs. 2.48
Maximum DSCR 1.45
Minimum DSCR 1.09
Average DSCR 1.25
SENSITIVITY ANALYSIS:

Pass through condition in sensitivity analysis are for situations where the changes in costs are
allowed to be passed on to the consumers. We observe from this analysis that IRR is sensitive to
changes in Project Cost mostly and so is Levelized Tariff for the mode of financing. DSCR
remains in acceptable region (>1) for all the assumed scenarios.

TABLE OF OUTCOMES FROM SENSITIVITY ANALYSIS:

PARAMETERS IRR DSCR LEVELISED TARIFF

 Base Cost 12.09% 1.25 2.48
Increase in project cost (5%) - pass through 11.81% 1.29 2.53
Increase in project cost (10%) - pass through 11.56% 1.33 2.57
Increase in project cost (5%) - not pass through 12.51% 1.23 2.51
Increase in project cost (10%) - not pass through 12.95% 1.20 2.54
Decrease in project cost (5%) - pass through 12.42% 1.22 2.44
Decrease in project cost (10%) - pass through 12.81% 1.18 2.4
Decrease in project cost (5%) -not pass through 11.68% 1.28 2.46
Decrease in project cost (10%) -not pass through 11.28% 1.31 2.43
Decrease in collection (5%) - postponement 12.12% 1.25 2.49
Decrease in collection (10%) - postponement 12.14% 1.26 2.49
Increase in fuel cost (5%) - pass through 12.12% 1.26 2.53
Increase in fuel cost (10%) - pass through 12.12% 1.26 2.57
Decrease in fuel cost (5%) - pass through 12.08% 1.25 2.46
Decrease in fuel cost (10%) - pass through 12.07% 1.26 2.41
Increase in O&M expenses (5%) - pass through 12.10% 1.25 2.50
Increase in O&M expenses (10%) - pass through 12.10% 1.25 2.52
Increase in O&M expenses (5%) - not pass through 12.09% 1.25 2.48
Increase in O&M expenses (10%) - not pass through 12.09% 1.25 2.48

CONCLUSION:

The Balance Sheet financing is the favoured mode of financing for the company. The
reasons for this are the long experience of the company in operation of Power plants, strong
balance sheet of the company, lower risk due to long term PPA which combines to allow the
company to raise loan at a significantly lower interest rate. This reduces the overall WACC of
the company and it enjoys decent long term returns. However the use of assets on the balance
sheet of the company as collaterals limits the financial flexibility for the company but this is
small hurdle for a company which enjoys such leadership position in the industry.

The average DSCR of 1.25 and minimum DSCR of 1.09 for the proposed project is on
the lower side. However due to strength of the balance sheet the company would still be able to
negotiate moratorium period and repayment period to its advantage.

As per the projected demand and supply scenario, sufficient demand for power to ensure
complete off-take from 500 MW project is possible. The Levelized Tariff for the project stands
at Rs. 2.48 / unit which is comparable to other similar projects developed in the past.

5.6 PROJECT FINANCING

Project highlights:
 The second mode of financing for the project is Project financing. The rate of interest for
the term loan is assumed to be 12%. The overall debt-equity ratio proposed remains to be 70:30.
Equity will be financed from internal resources of NTPC whereas the debt portion is proposed to
be financed from Domestic commercial borrowings/bonds. The loan moratorium period is
negotiated with the lenders to be 4 years and the repayment period is of 12 years. The
commercial operation date (COD) is envisaged in 42 months from the date of start of
construction.

Cost estimate and financial analysis:

Cost of Project excluding IDC Rs. 2643.13 Crores

IDC Rs. 356.87 Crores
Cost of Project including IDC Rs. 3000 Crores
Working Capital Margin Not considered in Capex
Cost of Project excluding IDC & WCM Rs. 2643.13 Crores
Cost per MW excluding IDC & WCM Rs. 5.28 Crore/MW
Cost per MW including IDC & WCM Rs. 6 Crore/MW

DETAILS OF TARIFF CALCULATION

The company for the above Plant calculates Tariff as per CERC guidelines and on the
basis of above assumptions along with those which are common to both the modes of financing.
The company prepares the following accounts viz. Profit & Loss, Balance Sheet, Cash Flow and
IRR, Sensitivity Analysis of the project for this mode of financing as well. The following table
summarizes the major findings of the calculation. The detailed calculation is annexed to this
report.

KEY INDICATORS CURRENT COST

Project IRR 12.94%
WACC 10.41%
Levelized Tariff Rs. 2.55
Maximum DSCR 2.03
Minimum DSCR 1.31
Average DSCR 1.59

SENSITIVITY ANALYSIS:

Pass through condition in sensitivity analysis are for situations where the changes in costs are
allowed to be passed on to the consumers. We observe from this analysis that IRR is sensitive to
changes in Project Cost and so is Levelized Tariff. DSCR remains in acceptable region (>1) for
all the assumed scenarios.

TABLE OF OUTCOMES FROM SENSITIVITY ANALYSIS:

PARAMETERS IRR DSCR LEVELISED TARIFF

Base Cost 12.94% 1.59 2.55
Increase in project cost (5%) - pass through 12.59% 1.64 2.60
Increase in project cost (10%) - pass through 12.30% 1.68 2.64
Increase in project cost (5%) - not pass through 13.44% 1.57 2.58
Increase in project cost (10%) - not pass through 13.94% 1.54 2.62
Decrease in project cost (5%) - pass through 13.36% 1.55 2.52
Decrease in project cost (10%) - pass through 13.81% 1.50 2.47
Decrease in project cost (5%) -not pass through 12.46% 1.62 2.52
Decrease in project cost (10%) -not pass through 12.01% 1.66 2.49
Decrease in collection (5%) - postponement 12.97% 1.59 2.56
Decrease in collection (10%) - postponement 12.98% 1.59 2.56
Increase in fuel cost (5%) - pass through 12.97% 1.59 2.59
Increase in fuel cost (10%) - pass through 12.97% 1.59 2.63
Decrease in fuel cost (5%) - pass through 12.93% 1.59 2.53
Decrease in fuel cost (10%) - pass through 12.93% 1.59 2.48
Increase in O&M expenses (5%) - pass through 12.94% 1.59 2.57
Increase in O&M expenses (10%) - pass through 12.96% 1.59 2.58
Increase in O&M expenses (5%) - not pass through 12.94% 1.59 2.55
Increase in O&M expenses (10%) - not pass through 12.94% 1.59 2.55
CONCLUSION:

The Project financing offers costlier cost of debt as result of which the WACC of the
project is high compared to Balance sheet financing. For a company like NTPC, which enjoys
over 30+ years of experience in Power Plant operations and running, strong balance sheet and
lower risk due to multiple projects this mode of financing is not suggested. However advantages
of Project financing can’t be ruled out for a new company in the field as this mode offers
financial flexibility to the firm and the company is able to keep its balance sheet asset free from
any collateral. Another disadvantage associated with Project financing is the signaling effect of
such a financing as market views this mode as a not-so-confident mode of financing by the
company and hence raises the return expected from the project.

The average DSCR of 1.59 and minimum DSCR of 1.31 for the proposed project is on
the lower side. (depending on this value the tie up for debt would be easier/ difficult. The
company may need to reassess the tenor of Debt repayment to improve DSCR and bankability of
the project.
 As per the projected demand and supply scenario, sufficient demand for power to ensure
complete off-take from 500 MW project is possible. The Levelized Tariff for the project stands
at Rs. 2.55/ unit which is comparable to other similar projects developed in the past.

Annexure: Key Assumptions underlying the Projections for the Project

1. Gross capacity of Power project has been taken at 500 (1 x 500) MW.
2. COD is assumed to occur after 42 months from the date of start of construction.
3. Date of Project cost estimation has been taken as 15 April 2010.
4. The rupee term loan: equity ratio is assumed to be 70:30.
5. Plant availability factor has been taken as 85%.
6. Auxiliary consumption has been assumed at 7% of gross energy generated.
7. Tariff has been taken as based on CERC regulation prevalent currently.
8. The interest rate on Rupee term loans is assumed to be 10% in case of Balance sheet
financing and 12% in case of Project financing.
9. Repayments are assumed to be in 8 years for Balance sheet financing and 12 years for
Project Financing.
10. The interest rate on working capital bank finance is taken at 11.75%.
11. Station Heat Rate has been taken at 2400 kcal/ kWh and GCV of coal has been taken as
3000 kcal/ kg.
12. Secondary fuel consumption has been taken as 1 ml/ kWh.
13. Coal price has been assumed at Rs. 850 per tonne with annual escalation of 0%. Cost of
secondary fuel is assumed at Rs. 40 / kl with annual escalation of 0%.
14. O&M expense have been assumed at Rs. 1.82 Million per MW with yearly escalation at
0%.
15. Working capital requirement has been assumed as one month’s O&M expense, O&M
spares equivalent to 20% of O&M expense, two months of fuel cost and two months of
receivables.
16. Companies Act Depreciation: 5.28%, subject to asset being depreciated till 95% of cost
price.
17. CERC depreciation: 5.28% p.a. SLM for first 13 years, balance up to 90% is spread over
the balance life of the project.
18. IT act depreciation: 5.28% p.a. WDV method.
19. The project life is assumed to be 25 years, in line with CERC regulations prevalent
currently.
20. Tariff has been discounted at 12% for calculating Levelized Tariff.