The Federation of Universities

Capital Structure at NTPC Limited

NTPC is a great success story of our times. It is imbued with the spirit of can do it. Mr. C P Jain, Chairman and Managing Director, NTPC.

INDUSTRY BACKGROUND
Way back in 1947, India had a power generating capacity of a meager 1,362 Megawatt (MW). There was power shortage in rural areas, and only a few of the urban centers had electricity. The process of generation and distribution of power was mainly carried out by the private players at that time. Post-independence, electricity was made subject to the concurrent jurisdiction of the State and the Central Governments. Eventually, the Electricity (Supply) Act, 1948 of India created the institutional framework under which the industry started taking shape. This particular framework was retained until recently when the Act was modified as the Electricity Act, 2003. This Act resulted in the creation of State Government Agencies that were bestowed with the responsibility to generate, transmit and distribute electricity within each state. During the mid-1970s, it was realized that relying only on the State Electricity Boards (SEBs) for power development was resulting in acute shortage of power and large inter-state imbalances. This was particularly seen in the light of the uneven distribution of coal and hydroelectric resources across the country. In order to cater to the increasing demands of the states, the central Government increased its role in the generation and development of power. National Thermal Power Corporation (NTPC) and National Hydro Power Corporation Ltd. (NHPC) were created in the year 1975 by the Central Government in order to establish thermal and hydro electricity generating plants. During the same year, the Central Electric Authority (CEA) was formed to establish a uniform national power policy. In the year 1992, the Power Grid Corporation India Limited (POWEGRID) was established aimed at constructing, operating and maintaining inter-state and interregional transmission systems. Today, these entities are collectively known as the Central Power Sector Utilities (CPSUs) and are directly accountable to the Ministry of Power (MoP). The other entities that are under the direct control of the MoP are the Power Finance Corporation (PFC) and the Rural Electrification Corporation. The Power Trading Corporation of India Limited (PTC) was established in the year 1999 to allow the surplus power supplies to be efficiently traded. The PTC is promoted by NTPC, POWERGRID, NHPC and PFC. In order to supplement the public sector investments, the Government of India (GoI) took major steps in the year 1991 in an attempt to attract private investments in the power sector. It allowed 100 percent foreign ownership of the power generating assets and also provided assured returns, a five-year tax holiday, and low equity requirements. In case of some private generators, the SEBs provided counter guarantees against non-payment of dues. But all these reforms too did not address the ailing financial health of the SEBs and the shortage of power continued to exist. The transmission and distribution losses were quite high due to inadequate metering, obsolete equipment and various theft related incidents. In order to provide an innovative incentive package to the states for the purpose of restructuring the power operations, the Government introduced the Accelerated Power Development and Reforms Program (APDRP) in the fiscal 2001. The primary objective of the program was to bring down the losses of the SEBs at least by 10 percent. The Government also introduced the scheme of One Time Settlement of Outstanding Dues that helped in the settlement of the SEBs payable to the CPSUs. It also set-up a system that facilitated the full payment of subsequent billings.

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COMPANY HISTORY
On 7th November 1975, National Thermal Power Corporation Private Limited (NTPC), a private limited company, 100 percent owned by the Government of India was incorporated under the Companies Act, 1956. On September 30th 1976, the word Private was deleted and the company was renamed National Thermal Power Corporation Limited. Later, in accordance to the shareholders resolution, on September 30th 1985, the company was converted from a private limited company to a public limited company as per the provisions of the Companies Act, 1956. After the incorporation, the company went on to become not only the largest utility of the country but also the leading power utility of international standard. The installed capacity of the company as on 31st March 2005 was 23,749 MW through its 13 coal based (19,480 MW), 7 gas/liquid fuel based (3955 MW) and 3 joint venture (coal based) projects (314 MW). NTPC generated 191,557 million units (Mus) of electricity in 2004-05 including 2447 Mus generated by its joint venture companies. Exhibit 1 provides a detailed summary of the same. Exhibit 1

Source: NTPC, Annual Report. Region Western Northern Eastern Southern Total JVs Grand Total Coal 2 5 4 2 13 3 16 Exhibit 2 Number of Stations Gas/Liquid Fuel Total 2 4 4 9 4 1 3 7 20 3 7 23 Installed Capacity (MW) Gas/Liquid Fuel Total 1293 5653 2312 7932 5900 350 3950 3955 23435 314 3955 23749

Coal 4360 5620 5900 3600 19480 314 19794

Source: NTPC, Draft Red Herring Prospectus. The chronological sequence of the companys major events is summarized in Exhibit 3. Exhibit 3: Major Events of the Company since Incorporation 1975 1978 1982 Incorporation of NTPC. Takeover of management of the Badarpur project. The first 200MW unit at Singrauli commissioned. The first direct foreign currency borrowing for NTPC a consortium of foreign banks led by Standard Chartered Merchant Bank extends a loan of GBP 298.41 million for the Rihand project. NTPC establishes a center for education at Power Management Institute, Delhi.

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2006-05 The transmission line based on HVDC (High Voltage Direct Current) technology, commissioned for power transmission from Rihand to Delhi. Singrauli project receives World Bank loan of Rs.150 million USD through Government of India. NTPC synchronizes its first 500MW unit at Singrauli. NTPC becomes one of the first PSUs to issue bonds in the debt market. NTPC crosses the 5000 MW installed capacity mark. NTPC raises first syndicated Japanese loan of 30 billion JPY. Consultancy division of NTPC is launched. First unit (88 MW) of NTPCs first gas based combined cycle power plant at Anta, Rajasthan commissioned.

1986 1987 1988 1989

NTPC builds up a total installed capacity of 10000 MW. First acquisition by NTPC of Feroze Gandhi Unchahar Thermal Power Station (2x210MW) from Uttar Pradesh Rajya Vidyut Utpadan Nigam of Uttar Pradesh. Pursuant to legislation by the Parliament of India, the transmission systems owned by the company were transferred Power Grid Corporation of India Ltd. Company was transferred to Power Grid Corporation of India Limited. 1993 For the first time, IBRD extends direct loan of US$ 400 million to NTPC under time slice concept for its projects. 1994 NTPC achieves 15000 MW of installed capacity. NTPC declares a dividend of Rs. 650 million for the first time. Jhanor-Gandhar (Gujarat) becomes the first thermal power station to have commissioned an integrated Liquid Waste Treatment Plant (LWTP). 1997 NTPC was identified by the GOI as one of the Navratna public sector undertakings. Achieves 100 billion units generation in one year. A consortium of foreign banks led by Sumitomo Bank, Hong Kong extends foreign currency loan of 5 billion Japanese Yen for the first time without GoI guarantee. 1998 Commissioned the first Naphtha based plant at Kayamkulam with a capacity of 350MW. 1999 NTPCs Dadri thermal power project, Uttar Pradesh adjudged the best in India with a PLF of 96.12 percent. Dadri, Uttar Pradesh certified with ISO-14001 on October 7. 2000 NTPC takes up construction of a hydro-electric power project of 800MW capacity in Himachal Pradesh. 2002 Three wholly owned subsidiaries of NTPC viz., NTPC Electric Supply Company Limited, NTPC Hydro Limited and NTPC Vidyut Vyapar Nigam Limited were incorporated. NTPC sets up ESP (Electrostatic Precipitators) at Talcher STPP. NTPC exceeds the 20000 MW installed capacity mark. 2003 NTPC undertakes debt re-structuring. Raises funds through bonds (Series XIIIth and XIVth) for prepayment of high cost GoI loans. 2004 The award of contract for the first Super Critical Thermal Power Plant at Sipat. Reached a total installed capacity of 22249 MW with the Talcher Unit V getting synchronized on May 13. NTPC Feroze Gandhi Unchahar Thermal station achieves a record PLF of 87.43 percent up from 18.02 percent in February 92 when it was taken over by NTPC. LIC extends credit facility for Rs.70 billion Rs.40 billion in the form of unsecured loans and Rs.30 billion in the form of bonds. NTPC makes its debut issue of euro bonds amounting to US$ 200 million in the international market. Source: Various Newspaper Clippings.

1990 1992

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ORGANIZATION STRUCTURE
NTPC has four subsidiaries, namely, NTPC Vidyut Vyapar Nigam Limited (NVVN), NTPC Hydro Limited (NHL), NTPC Electric Supply Company Limited (NESCL) and Pipavav Power Development Company Limited (PPDCL). NVVN, a wholly owned subsidiary of the company, was incorporated on 1st November 2002. It was primarily set up to carry out power trading by purchasing all forms of electrical power from resource including imports from abroad and also to sell such power to the various customers including the SEBs and to bulk customers in India and abroad. NHL, another wholly owned subsidiary of the company was established on December 12th 2002 with the main objective of developing small and medium hydroelectric power projects with capacity up to 250 Megawatt. NESCL is another wholly owned subsidiary of NTPC that was incorporated on August 21 2002, with the objective of entering into business of distribution and supply of electrical energy. The fourth wholly owned subsidiary of NTPC named PPDCL was incorporated on December 20 2001, as a consequence of presidential directive from the GoI to set up a company for the purpose of acquiring land and the developing infrastructure for setting up power projects in the state of Gujarat. Apart from the wholly owned subsidiaries, the company has also entered into several joint ventures where it has a considerable stake. These JVs include, Utility Powertech Limited, NTPC Alstom Power Services Private Limited, Power Trading Corporation of India Limited, NTPC Tamil Nadu Energy Corporation Limited, NTPC SAIL Power Corporation Limited and Bhilai Electric Supply Co. Private Limited. (The detailed structure of the companys organizational framework is summarized in Exhibit 4.) Exhibit 4: Corporate Structure National Thermal Power Corporation Limited

100% Pipavav Power Development Co. Ltd.

100% NTPC Electric Supply Co.Ltd.

100% NTPC Vidyut Vyapar Nigam Ltd.

100% NTPC Hydro Ltd.

50% Utility Powertech Ltd.

50% NTPC Alstom Power Services Pvt. Ltd.

8% Power Trading Corporation of India Ltd.

50% NTPC Tamilnadu Energy Co. Ltd.

50% NTPC SAIL Power Co. Pvt. Ltd.

50% Bhilai Electric Supply Co. Pvt. Ltd.

Source: www.ntpc.co.in

NTPCs SHARE IN THE INDIAN POWER SECTOR

As at the end of March 2005, the companys installed capacity was around 19.79 percent of the total installed capacity of the country and the company contributed 27.09 percent of the total power generated in the country during the fiscal 2004-05. When the contribution of the joint venture companies were included, the companys share of installed capacity stood at 20.06 percent and at 27.51 percent of the total power generated in the country. (Exhibit 5)

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Source: Annual Report, NTPC.

CAPITAL STRUCTURE
Liquidity Management NTPC is dependent on both internal as well as external sources of funds to provide liquidity and to fund its capital requirements. Traditionally, the company has funded its capital expenditures with internally generated funds, equity contributions by the Government and debt. The company entered into long-term borrowing in the form of bank loans or bonds that are denominated either in Rupees or foreign currencies. As on March 31 2004, the company had cash and cash equivalent of Rs. 66,351 million that represented an increase of Rs.42,457 million in the fiscal 2004. Till March 2005, the total investment of NTPC stood at Rs.51,9881.1 million. The detailed break up of the same is provided in the Exhibit 6. Exhibit 6 Sl. No. 1. Sources of Funds Funds from GoI Equity Share Capita: Loans from GoI: Grant-in-Aid: Bonds issued in domestic market Loans from domestic financial institutions Foreign loans Internal resources including share premium Total INR Million 119217.6 82454.6 36730.3 32.7 44,805.8 91,901.4 119,600.7 144,355.6 519,881.1

2. 3. 4. 5.

Source: Annual Report, NTPC. The company has been accepting deposits from the public to cater to the working capital requirement. The deposits as of 31 March 2005, were Rs.4,166 million, generated from 2222 depositors.

INITIAL PUBLIC OFFER

In an effort to raise external funds, the company came out with an Initial Public Offer (IPO) in October 2004 that comprised 432.915 million equity shares that constituted 5.25% of the post issue capital. The Government, that held 100% equity in the company also its offer for the sale of the entire share capital base. The price of the issue was fixed at Rs.62 per share. The response to the issue was overwhelming and was oversubscribed by 13.14 times. The total amount raised from the issue was Rs.235,241 million. An amount worth Rs.181,560 million was refunded after retaining the proceeds that totaled Rs.53.681 million. A total of Rs.26,840.7 million was credited to the Government account towards the sale of the holding in NTPC and Rs.29,840 million was retained by the company towards share capital and share premium. The shares were listed on the NSE and the BSE on November 05, 2004. 103

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DIVIDENDS
Dividends of the company are approved at the annual general meeting of the shareholders based on the recommendations of the board. Exhibit 7 provides the details as to the dividend payment of the company in the previous years. Exhibit 7: Details of Dividend Payment Fiscal 2005 Face value of equity shares Dividends (Rs. million) Dividend tax Dividend per equity share Dividend rate approximate (%) Source: CMIE, Prowess DataBase. Note: A stock split was initiated in the year 2002; as a result each equity share of Rs.1000 was divided into 100 equity shares of Rs.10 each. 10 19,790 2680 2.40 24.0 Fiscal 2004 10 10,823 1,387 1.39 13.9 Fiscal 2003 10 7,080 395 0.91 9.1 Fiscal 2002 1,000 7,079 0 90.61 9.1

FUNDING PATTERN
As has been stated earlier, NTPC is a Government owned company, where the Government of India holds 89.50 percent of the equity. The company was initially formed with an authorized share capital of Rs.1,250 million that stood at Rs.100,000 million as on 31st March 2005. The paid-up equity capital as on that date was Rs.82,455 million that includes a 73796.3 million contribution by the GoI and Rs.8658.4 million held by the public, employees and Qualified Institutional Buyers (QIBs). The growth of the authorized capital, share capital, and reserve and surplus is summarized in Exhibit 8. Exhibit 8

Source: Annual Report, NTPC.

DEBT STRUCTURE
As stated earlier, the company relies on both Rupee and foreign currency denominated borrowings. A significant portion of the companys capital has been in the form of foreign currency loans from multilateral agencies such as the World Bank and the Asian Development Bank. These loans are 104

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guaranteed by the GoI. Of late, it is observed that the company has increased its reliance on the Rupee and foreign currency denominated commercial borrowings. These are mainly in the form of export credit for imported equipments/syndicated loans and domestic borrowings in Rupees in the form of loans and bonds. The company has both secured and unsecured borrowings out of which the secured borrowings are mainly in the form of Rupee denominated bonds. (See Exhibit 9) Exhibit 9 Debt Profile (INR bn.) Secured Unsecured Banks/FI Non-Bank Indian Banks/FI Int'l Banks World Bank Govt. of India GOI Guaranteed Private PI/K Market Foreign Currency Indian Rupees Total Debt % Total Secured Unsecured Banks/FI Non-Bank Indian Banks/FI Intl Banks World Bank Govt. of India GoI Guaranteed Private PI JK Market Foreign Currency Indian Rupees Total Debt 31.4 68.6 43.6 56.4 4.2 37.8 1.6 28.2 39.1 28.1 39.3 60.7 100.0 33.8 66.2 41.9 58.1 3.7 33.8 4.5 30.6 35.5 27.5 38.2 61.8 100.0 33.7 66.3 45.0 55.0 3.4 31.1 10.6 32.0 25.9 22.9 41.6 58.4 100.0 31.6 68.4 57.8 42.2 2.5 38.3 17.0 27.9 32.1 14.4 55.3 44.7 24.1 75.9 64.3 35.7 7.6 40.6 16.1 25.9 28.5 9.8 56.7 43.3 20.0 80.0 69.5 30.5 16.8 36.6 16.0 25.2 27.4 5.3 52.7 47.3 14.2 31.2 85.8 68.8 73.6 75.0 26.4 25.0 23.4 32.7 36.9 30.8 13.3 11.5 18.9 1.1 30.8 30.1 7.5 23.9 50.2 42.3 49.8 57.7 29.7 70.3 69.5 30.5 37.3 23.3 8.9 0.6 26.1 29.8 37.9 62.1 30.1 69.9 69.3 30.7 37.8 22.6 8.9 0.6 25.9 30.1 37.6 62.4 1996 33.2 70.3 44.7 57.8 4.3 38.8 1.6 29.0 40.1 28.9 40.3 62.2 102.5 1997 32.7 64.0 40.5 56.2 3.5 32.7 4.3 29.6 34.4 26.6 37.0 59.8 96.7 1998 30.0 59.2 40.2 49.0 3.0 27.7 9.4 28.6 23.1 20.5 37.1 52.1 89.2 1999 30.5 65.9 55.7 40.7 2.4 36.9 16.4 26.9 30.9 13.8 53.3 43.1 96.4 2000 24.3 76.5 64.8 36.0 7.7 40.9 16.3 26.1 28.7 9.9 57.1 43.6 100.8 2001 2002 2003 2004 1H05 19.7 78.4 68.1 29.9 16.5 35.9 15.7 24.7 26.9 5.2 51.6 46.4 16.5 41.2 45.8 45.5 99.4 90.9 108.7 105.9 85.2 99.1 107.5 105.0 30.6 33.0 27.1 43.2 42.7 40.7 15.5 15.2 21.9 1.4 35.6 39.8 8.7 31.6 58.2 55.9 57.7 76.3 47.1 57.7 36.1 13.7 1.0 40.4 46.1 58.6 95.9 46.5 57.3 34.2 13.4 0.9 30.2 45.6 56.9 94.5

98.0 115.8 132.2 154.5 151.5

100.0 100.0

100.0 100.0 100.0 100.0 100.0

Source: NTPC, Fitch. NTPC has maintained low levels of debt and at the same time good debt coverage ratios since the year 1990 considering the fact that the company witnessed rising capital outlays and modest outflows of cash. In the FY04, the net debt to EBITDA was 1.8 that remained at a level or below 2.1 since 1998. At the same time the EBITDA/ net interest was 6.1 that remained above 6.0 in the last five years. (Exhibit 10) 105

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Exhibit 10: National Thermal Power Corporation Limited Financial Summary INRbn 30 Sep. 04 105.6 20.5 27.3 17.7 5.4 23.4 71.8 607.0 2.1 150.6 0.9 153.5 378.9 532.5 44.1 3.2 47.3 30.6 5.4 0.0 0.0 3.1 8.2 6.7 31 Mar. 04 198.4 2.0 49.2 28.7 10.9 52.6 66.4 596.3 1.7 153.5 1.0 156.2 355.5 511.7 60.5 3.6 56.9 46.7 10.0 0.0 3.5 23.3 20.0 16.2 31 Mar. 03 194.5 9.1 57.1 41.4 9.5 36.1 23.9 493.4 1.6 130.7 1.4 133.8 315.1 448.9 74.9 15.8 59.1 32.9 9.2 0.0 11.1 11.9 5.9 15,2 31 Mar. 02 178.3 7.9 50.7 36.9 7.8 35.4 13.7 450.5 1.8 93.9 21.9 117.6 286.5 404.1 62.7 21.1 41.6 30.8 8.9 0.0 8.2 9.8 16.2 24.6 31 Mar. 01 193.5 17.9 69.0 44.9 9.4 37.3 12.0 423.6 1.7 73.3 24.7 99.8 258.2 358.0 87.8 18.4 69.4 25.4 9.9 0.0 4.3 38.3 8.4 3.1 31 Mar. 00 164.1 17.1 61.6 40.2 9.4 34.2 24.2 401.8 2.8 74.7 26.1 103.5 229.1 332.6 73.4 2.9 70.5 36.9 9.8 1.0 7.6 20.7 3.5 10.0 31 Mar. 99 140.2 12.8 54.9 35.0 9.8 28.2 23.5 354.5 2.9 69.6 26.9 99.3 201.5 300.8 62.3 7.1 55.2 27.0 10.8 1.7 7.2 14.1 2.3 8.9 31 Mar. 98 31 Mar. 97

Income Statement Revenues Revenue Growth EBITDA EBIT Interest Incurred Net Income Balance Sheet Cash and Equivalents Total Assets Short-term Debt Senior Long-term Debt Subordinated Debt Total Debt Common Equity Total Capital Cash Flow CF from Operations Change Op Working K Net Cash Op Activities Capital Expenditure Financing Cost Equity Raised Dividends Other Net Debt Dec/(Inc) Net Free Cash Flow Profitability EBITDA/Revenues EBIT/Revenues Net Income/Revenues 106

124.2 101.4 22.6 49.3 31.9 12.7 21.5 18.6 21.6 39.3 24,6 11.1 16.8 19.2

306.1 279.5 2.9 60.6 28.6 3.6 67.2 29.6

92.1 100.3 178.8 161.4 271.0 261.7 53.4 2.4 50.9 18.8 45.0 8.9 36.0 9.2

13.9 10.9 1.4 5.5 6.7 7.5 13.0 0.7 4.4 2.0 10.2 9.8

25.9 16.7 22.2

24.8 14.5 26.5

29.4 21.3 18.6

28.4 20.7 19.9

35.7 23.2 19.3

37.5 24.5 20.9

39.2 25.0 20.1

39.7 25.7 17.3

38.8 24.2 16.6

NTPC INRbn 30 Sep. 04 31 Mar. 04 31 Mar. 03 31 Mar. 02 31 Mar. 01 31 Mar. 00 31 Mar. 99

2006-05 31 Mar. 98 31 Mar. 97

Credit Ratios EBITDA/Interest EBITDA/Net Interest Total Debt EBITDA Net Debt/EBITDA Total Debt /Total Capital 5.0 13.3 2.8 3.0 28.8 4.5 6.1 3.2 1.6 30.5 6.0 8.9 2.3 1.9 29.8 6.5 30.9 2.3 2.1 29.1 7.3 13.6 1.4 1,3 27.9 6.6 11.4 1.7 1.3 31.1 5.6 7.7 1.8 1.4 33.0 3.9 4.8 1.9 1.5 34.0 3.5 4.1 2.6 2.1 38.3

Revenue growth figures are year on year; Debt/EBITDA for 1H05 (6 months ended 30 September 2004) uses 1H05 EBITDA x 2, cash flow figures for 1H05 include Fitch estimates; op (operating), Dec/Inc (Decrease/Increase). Source NTPC, Fitch. The company has substantial forex debts that are mostly denominated in US$. Since most of the debts are in unhedged state, forex exposures can pose substantial material risk to the company. The company is aware of such risks and has thus reduced its forex risks in the last five years from 57 percent in year of all debts to 38 percent in 1H05. At the same time, the forex risks have been reduced by the strengthening of the Indian Sovereign bonds by the Fitch ratings. In the past, the company had a record of borrowing substantial funds from official sources such as the GoI, the IBRD and the ADB. The GOI has also guaranteed around 25 percent 35 percent of NTPCs debts historically. It is worth mentioning here that the international borrowings in the past were covered by the GOI guarantees. The company enjoyed both the repeat lenders and a growing roster of international banks in its syndicated facilities that comprised over 50 international banks from Asia, US, Japan and Europe. In an attempt to diversify the funding process and develop self-sustaining funding capabilities, the company reduced the share of the GoI guaranteed debt in its debt structure from a level of 39 percent of total debt in FY 96 to around 26 percent in 1H05. It has also phased out borrowings from the GoI and the World Bank from 41 percent of total debt in FY 01 to around 9 percent in 1H05. The company has successfully tapped both the international equity and debt markets in the past that started with an international issue of US$ 200million and an IPO listing 10.5 percent of its shares. This helped the companys access to the capital markets and further strengthen its funding capabilities. Exhibit 11 provides a detailed understanding of debt, along with the applicable currencies that mature or in respect of which payment is due in the fiscal years as mentioned. Exhibit 11 Currency Fiscal 2005 7859.5 30.1 3987.6 25.5 Fiscal 2006 11480.0 8.0 4053.6 26.8 Fiscal 2007 12065.7 8.0 4600.4 28.1 Fiscal 2008-2011 41511.7 8.2 9761.2 302.7 Fiscal 2002 onwards 2969.5 0.0 59826.8 87.5 Total

Rupees Euro Japanese Yen US$

95886.4 54.2 82229.4 470.6

Source: Draft, Red Herring Prospectus, NTPC Limited. 107

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ISSUANCE OF THE EURO BONDS

In March 2004, NTPC made its initial issue of Euro Bonds to the tune of US$ 200 million in order to finance the capital expenditure of its ongoing as well as the new projects. The bonds carried a coupon of 5.5 percent per annum payable half yearly and to be redeemable at par on March 10 2011. The bonds received considerable response from the international investors and attracted around 79 accounts. The distribution of the investors was wide. The Asian investors accounted for 45 percent of the proceeds, the European investors for 47 percent and the balance of 8 percent went to the US offshore accounts. With the issue of these bonds, the company was successful in tapping a new investor base that was at that time unexplored under the conventional syndicated loans market dominated by the commercial foreign banks. Apart from the banks contribution of 32 percent of the loans of the bonds, the asset managers contributed the largest chunk by subscribing to 39 percent of the bonds. The balance was contributed by the pension and insurance funds that comprised 17 percent and retailers contributing the rest 12 percent.

DOMESTIC BORROWINGS
As a part of NTPCs debt management strategy, to take the complete advantage of the falling interest rates in the domestic markets, the company prepaid a considerable portion of its high cost loans from the Government of India and as a consequence saved interest payments to the extent of Rs.5.28 billion over the remaining tenure of those bonds. The company renegotiated the interest rates for high cost loans drawn by it. The estimated savings on the balance life of the loan amounts to Rs.1100 million. It has also tied up the line of credit facility of Rs.70 billion with Life Insurance Corporation (LIC) of India in the form of unsecured term loans worth Rs.40 billion and bonds worth Rs.30 billion. This amount is available for meeting the capital expenditure and could be drawn over 4 years with the tenure of the facility being 20 years.

CREDIT RATING
NTPC appointed several reputed credit rating agencies to provide impartial ratings to its bonds. The primary among them was CRISIL (Credit Rating and Investment Services of India Ltd.). The company was appointed to rate NTPCs domestic bonds, fixed deposits and commercial paper issues. CRISIL gave a AAA rating to bond issued during March 2005 that indicates a high degree of safety in payment of interest and principal. The fixed deposits have been provided a rating of FAAA indicating the highest order of safety in payment of interest and principal. The commercial papers were rated as P1 that indicted a strong degree of safety in payment of interest and principal. Exhibit 12 provides a summary of the same. Exhibit 12: CRISILs Rating Rationale National Thermal Power Corporation Limited February 2005 Rs.5 Billion Bond Issue Rs.5 Billion Bond Issue Rs.15 Billion Bond Issue Rs.5 Billion Bond Issue Fixed Deposit Program Rs.2.5 Billion Commercial Paper Program Source: NTPC, Annual Report. Another agency ICRA (Investment and Credit Rating Agency) assigned LAAA on the companys bonds that provided similar indications as to the credit worthiness of the company. Exhibit 12 provides a summary of the same. 108 AAA (Reaffirmed) AAA (Reaffirmed) AAA (Reaffirmed) AAA (Reaffirmed) FAAA (Reaffirmed) P1+

NTPC Exhibit 13: NTPC: Key Financial Indicators 31.03.04 Met Sales Operating Income Operating Profit before Depreciation, Interest and Tax Profit after Tax Equity Capital Net Worth Profit after Tax/Operating Income (%) Profit before Interest and Tax/ (Total Debt + Net Worth) (%) Operating Profit before Depreciation, Interest and Tax/Interest and Finance Charges (Times) Net Cash Accruals/Total Debt (Percent) Total Debt/Net Worth (Times) Current Ratio (Times) Note: Amounts in Rs. Billion Source: NTPC, Annual Report. 189.37 189.75 38.18 52.61 78.13 355.50 27.73% 13,01% 5.13 39,24% 0.43 1.57 31.03.03 190.21 19137 5287 36.08 78.1300 315.04 18.35% 9.82% 8,31 33.21% 0.42 3.45

2006-05

31.03.02 177.87 178.58 50.66 35.40 78.13 286.45 19.82% 10.84% 8.31 36,40% 0.40 272

In the year 2004, S&P (Standards and Poors) was given the responsibility to rate NTPCs foreign currency corporate bonds. S&P provided a positive outlook on the same. NTPCs Euro Bond issue of US$ 200 million that ended in March 2004 was provided BB ratings. This rating was further revised to BB+ as on February 2005.

CASH FLOWS IN NTPC

Cash Generated from Operations NTPC generated a total of Rs.58,118 million from its operating activities in the fiscal 2004. The company had a net profit before tax and a prior period adjustment of Rs.41,547 million. The companys net cash from operating activities reflects that non-cash items depreciation was to the tune of Rs.20,246 million, a total of Rs.5,835 million for provision and Rs.1,320 million in deferred revenue on account of advance against depreciation. The cash from operating activities excludes the interest income to the tune of Rs.18,769 million on bonds issues under the on time settlement scheme. Changes in the assets and liabilities that had a current period cash flow impact consisted mainly of increase in the working capital of Rs.643 million that is composed of increase in trade and other receivables that was offset in part by an increase in trade payables. The net cash from operating activities also reflects a net amount of Rs.2,722 million for direct taxes paid less the income tax recoverable. For the year ending March 31, 2005, the net cash from operating activities also reflects a net amount of Rs.51,018 million for direct taxes paid less the income tax reversible.

INVESTING ACTIVITIES
The company had used net cash in investing activities to the tune of Rs.24,597 million in the fiscal 2004. This mainly reflected expenditures on fixed assets of Rs.46,654 million, and receipt of interest income from the bonds issues under the companys tripartite agreement amounting to Rs.22,984 million. The bonds were to be allotted in the fiscal 2002 but were actually issued at a later date. For the year ending March 31, 2005, the net cash used in investing activities was Rs.64,611 million. 109

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FINANCING ACTIVITIES
In the fiscal 2004, the companys cash flow from operating activities was Rs.8,873 million. It raised Rs.37,949 million of new borrowings. The borrowings included Rs.8,862 million worth 5.5 percent bonds due to mature in the year 2011. The bonds were denominated in US dollars and were the first bonds that the company sold in the Eurobond market. The domestic borrowings included Rs.7,000 million in denominated bonds and Rs.17,344 million in term loans. In the fiscal 2004, the company repaid Rs.15,578 million of its borrowings and paid interest of Rs.10,023 million. The final dividend paid during the same period was Rs.3,080 million.

CAPITAL EXPENDITURES
The company incurs capital expenditures mainly for installation of new capacity and expansion of existing capacity. The capital expenditure of NTPC in the fiscal 2002, 2003 and 2004 was Rs.31,366 million, Rs.32,906 million and Rs.46,654 million respectively. The company also intends to invest some portion of its budgeted expenditure in its subsidiaries and joint ventures in connection with their expansion plans. The primary objective of the issue was to utilize the proceeds for the expansion of the companys generation capacity through the following six identified projects: 1. 2. 3. 4. 5. 6. The Rihand Super Thermal Power Project, Stage II. Vindhyachal Super Thermal Power Project, Stage III. Khalgaon Super Thermal Power Project, Stage II. Sipat Super Thermal Power Project, Stage I. Sipat Super Thermal Power Project, Stage II. Feroze Gandhi Unchahar Thermal Power Project, Stage III.

These identified projects include the expansion of the existing thermal power plants as well as the establishment of new thermal power plants that is expected to increase the power generation capacity by 6,690 MW. The projects are proposed to be funded with debt and equity in the ratio of 70:30. The equity component of the identified project was decided to be funded by a combination of internal accruals of the company and the proceeds of the fresh issue. The details pertaining to the same are provided Exhibit 14. Exhibit 14: Financing of Identified Projects 1. 2. Approved cost of the identified project Amount spent as on August 31st 2004 Remaining Cost (12) 3. 4. 5. 6. Undrawn domestic debt facilities as on 31st 2004 Undrawn foreign debt facilities as on 31st 2004 Aggregate undrawn debt facilities as on 31st 2004 (3 + 4) Excess of remaining cost over aggregate undrawn debt facilities 268,243 41,079 227,164 91,800 16,295 108,095 119,069

Source: NTPC, Draft, Red Herring Prospectus. The company further proposed to finance the excess of remaining cost over aggregate undrawn debt facilities through further debt, net proceeds of its fresh issue and Internal accruals to the extent required. During the previous years, the company had incurred a considerable expenditure on the said projects. The expenditures being capital intensive, were subjected to proper appraisal before deployment of capital. The appraisals were done by independent agencies namely ICICI and IDBI. The details of the capital expenditure pertaining to the projects are provided in Exhibit 15.

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NTPC Exhibit 15: Funds Deployed as on 31st August 2004 Project The Rihand Super Thermal Power Project, Stage II Vindhyachal Super Thermal Power Project, Stage III Khalgaon Super Thermal Power Project, Stage II Sipat Super Thermal Power Project, Stage I Sipat Super Thermal Power Project, Stage II Feroze Gandhi Unchahar Thermal Power Project, Stage III Total Source: NTPC, Draft, Red Herring Prospectus.

2006-05

Expenditure incurred as on 31st August 2004 (Rs. in millions) 18,477 7,224 5,009 6,168 3,135 1,066 41,079

RISK MANAGEMENT
Though the major component of revenue for the company is in Rupees, it has borrowed funds in other currencies primarily Japanese Yen, Euros and US Dollars as indicated in Exhibit 10. The principal and the interest payments on these borrowings are denominated in the respective foreign currencies. Under the tariff regulations that are provided for the fiscal 2005-2009, fluctuations in exchange rates for offshore borrowings are recoverable through the companys tariffs. Since the regulations allow the company to recover the foreign exchange fluctuations, the company does not completely hedge its foreign currency exposures. Apart from this, as per the tariff regulations, interest costs are also recoverable through the companys tariffs. The company is subjected to risks that may arise out of changes in interest on the working capital. The recovery of the interest rate is based on the guidelines fixed by the CERC. If the interest rates tend to rise the company may not be in a position to recover a portion of the interest through its tariffs. NTPCs major chunk of long-term borrowings are fixed interest borrowings and thus the company does not entirely hedge against interest rate fluctuations.

HEDGING STRATEGIES
NTPC uses an efficient mix of domestic and foreign currency borrowings to fund their new projects. As mentioned, the company is protected against any adverse exchange rate fluctuations, as the same appreciation is passed through cost in pursuance of the Tariff Policy and Power Purchase Agreement signed with the SEBs. However, the company has adopted a passive hedging strategy in order to minimize the effect of both the exchange rate and interest rate volatilities. The company has undertaken the following measures in that regard. a. b. Interest rate/cross currency interest rate swaps on a limited basis. Borrowing in various currencies.

As an integral part of the debt management policy and in line with minimizing the interest costs, the company has pre-paid a certain amount of its high cost foreign currency borrowings by taking fresh loans at lower interest rates. The company has pre-paid loans worth Yen 55.34 billion, USD 120 million and Euro 27.60 million and replaced these loans through fresh borrowings that have resulted in a savings of Rs.2106.6 million for the balance maturity. During the fiscal 2001-02, the company restructured its French and Belgian loans in order to effect savings towards the cost of interest. These loans carried a provision for interest payment of interest 29.2 percent p.a (fixed) and 10.40 percent (fixed) respectively that was changed to floating rate basis. The interest that was payable in November 2005 was @ Euribor plus 75 basis points. Further, the floating rate interest was swapped to fixed rate of interest payable 4.3575 percent p.a during the year 2002-03. This revised interest rate resulted in a total savings of Rs.328.3 million under the French loan and Rs.50.2 million under the Belgian loan. 111

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INDUSTRY OUTLOOK Though it is true that the electricity generation capacity has witnessed an upward trend in the recent years, the demand for electricity in the country is significantly higher than the available supply. In the fiscal 2004, there was an energy shortage of approximately 7.1 percent of the total energy requirement and 11.2 percent of peak demand requirement. Exhibit 16 reveals the gap between the total requirements for electricity as against the total amount of electricity that was made available from the fiscal 2000 to fiscal 2005. Exhibit 16: Actual Power Supply Position Fiscal Year Requirement (Million units) 2000 2001 2002 2003 2004 480,430 507,216 52,537 545,983 559,264 Availability (Million units) 450,494 467,400 483,350 497,890 519,398 Surplus /Deficit (+/) (Million units) 29,836 29,816 39,817 48,093 39,866 (Million units) 6.2% 7.8% 7.5% 8.8% 7.1%

Source: Ministry of Power Report, 2002-2003, CEA Executive Summary, March 2004: CEA Annual Report, 2002-2003. With such huge power requirement, NTPC has the strong potential of increasing its market share in the years ahead. The companys turnover and its operating profits can grow at a significant rate. With strong financial position and power generating capacities, it is to be seen as to how the company fares in the future.

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References
1. 2. 3. 4. 5. 6. 7. NTPC, Annual Report. NTPC, Draft Red Herring Prospectus. CMIE, Process DataBase. NTPC, Fitch. Draft, Red Herring Prospectus, NTPC Limited. Ministry of Power Report, 2002-2003, CEA Executive Summary, March 2004: CEA Annual Report, 2002-2003. www.ntpc.co.in

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