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NTPC LTD

ANAND ENGINEERING COLLEGE AGRA

PROJECT REPORT
CAPITAL BUDGETING OF NTPC LTD, UNCHAHAR
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SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN FINANCE.

CAPITAL BUDGETING OF ANALYISE NTPC Ltd,

UNCHAHAR
SUBMITTED BY: MOHAMMAD ANAS MBA- FINANCE (2011-2013)

INDUSTRY GUIDE: Mr. P. Gopal Ranga Manager (Finance) AIBS, AUUP NTPC Ltd, Unchahar

ANAND ENGINEERING COLLEGE AGRA UTTAR PRADESH
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TO WHOM IT MAY CONCERN

This is to certify that Mr. MOHAMMAD ANAS, a student of Anand Engineering colleges undertook a project on Capital Budgeting of Stage Analysis of NTPC Ltd, Unchahar from, 25 July 2012 TO 4 August 2012 . Mr. MOHAMMAD ANAS has successfully completed the project under the guidance of Mr. P.Gopal Ranga sir .He is a sincere and hardworking student with pleasant manners. We wish all success in her future endeavors.

Signature with date Name: - Mr. P.Gopal Ranga Designation: - Manager (Finance) Company Name: - NTPC UNCHAHAR

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CERTIFICATE of ORIGIN

This is to certify that Ms. MOHAMMAD ANAS, a student of MBA (Finance), Anand Engineering Colleges has worked at NTPC Ltd, Unchahar, under the guidance and supervision of Mr.P.Gopal Ranga, Manager (Finance), NTPC Ltd, Unchahar.

The period for which he was on training was 8 weeks, starting from 25 July, 2012 to4 August, 2012. This Summer Internship report has the requisite standard for the partial fulfillment the Post Graduate Degree in Finance. To the best of our knowledge no part of this report has been reproduced from any other report and the contents are based on original research.

MOHAMMAD ANAS (Stu dent MBA, 3 SEM)
rd

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Roll No:-1100170025

ACKNOWLEDGEMENT
I express my sincere gratitude to my industry guide Mr.P.Gopal Ranga, Manager (Finance), NTPC Ltd, Unchahar, for his able guidance, continuous support and cooperation throughout my project, without which the present work would not have been possible. I would also like to thank the entire team of Finance Section Team, for the constant support and help in the successful completion of my project.

Also, I am thankful to my faculty guide Mr.Gaurav Agarwal of my institute, for his continued guidance and invaluable encouragement.

MOHAMMAD ANAS
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Contents
1. EXECUTIVE SUMMARY ..................................................................... 7 2. INTRODUCTION .................................................................................. 8 2.1. SCOPE OF STUDY .......................................................................... 8 2.2. OBJECTIVE BEHIND STUDY ............................................................... 9 3. INDUSTRY PROFILE .......................................................................... 10 3.1 OVERVIEW .............................................................................. 10 3.1.1 Thermal Generation .............................................................. 11 4. COMPANY PROFILE ........................................................................... 12 4.1. NTPC OVERVIEW ...................................................................... 12 4.1.1 Business of NTPC Ltd .................................................................. 13 4.2. SWOT ANALYSIS.................................................................... 14 4.3. NTPC Unchahar: An Overview ........................................................ 15 5. Finance Department of NTPC, Unchahar ................................................... 16 6. CAPITAL BUGETING .......................................................................... 18 6.1. Types of Budget in NTPC LTD Unchahar ................................................. 19
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7. CALCULATION OF CAPITAL BUDGETING IN STAGE-III .................................. 22 7.1. Cost Structure of a Project ......................................................... 22 7.2. Calculation of Net Inflow Stage -III ................................................... 24 7.2.1. REVENUE ON ACCOUNT OF FIXED CAHRGES ................................................................... 24 7.2.2. COST ON ACCOUNT OF FIXED COMPONENTS: ................................................................. 27 7.2.3. MARGINAL CONTRIBUTION ON ACCOUNT OF ITEMS OF VARIABLE NATURE .. 28 8. Findings & Analysis ........................................................................... 29 9. Recommendations ............................................................................ 37 10. Conclusion ....................................................................................... . 38 11. Reference .......................................................................................... 39 12. Annexure .......................................................................................... 40 12.1 Abbreviation ................................................................................. 40 13. Case Study: NTPC in Comparison to its Competitors in the Era of Competitive Tariff Bidding .......................................................................................................... 41 14. SYNOPSIS ........................................................................................... 55

1. EXECUTIVE SUMMARY
The aim of this project is to study the Capital Budgeting of NTPC Ltd, Unchahar. It also aims to make understand and bridge the gap between the theoretical learning and practical learning. This report presents how capital budgeting forms the backbone of finance in any company. In NTPC most of the investment is done in either expansion or renovation of existing assets. Hence to demonstrate the capital budgeting of Stage III of Unchahar power plant, performance reports since the date of commission i.e. 1 January, 2007 are taken into consideration in order to derive in how many years the company can recover its initial investment.
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This report also highlights the how the tariffs are decided and what all components are considered in order to derive the initial investment proposal suggested to a thermal power plant.

2. INTRODUCTION

2.1. SCOPE OF STUDY
NTPC LTD is the largest producer of electricity in the country. From this study we see that how company plans their budget according to their requirement is important.

i. Capital expenditure plans involve a huge investment in fixed assets. NTPC LTD requires capital investment for purchase of plant & machinery, land & building, expansion of existing unit, installation of new parts in existing machineries, boiler, heaters, tubes, construction of new office building, roads, bridges, replacement and maintenance of existing parts, new technology and merger and acquisition.
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ii. Capital expenditure once approved represents long-term investment that cannot be reserved or withdrawn without sustaining a loss. iii. Understanding the capital structure of NTPC. Of the total investment NTPC apply for 70% of amount with loans from Indian banks or foreign bank and 30% of the amount is raised through equity as per CERC. iv. Capital Budgeting is done to assess the profitability of project. It may be asserted here that decision regarding capital investment should be taken very carefully so that future plans of the company are not affected adversely.

S2.2. OBJECTIVE BEHIND STUDY
Capital budget system is a very vast subject. Simultaneously, it is a basic need of every company to make the budget. Planning is essential to attain organizational goals. This topic is very essential to every company and it has special importance in the current competitive world. Taking into consideration the vast importance of capital budget, the objective behind this study work is as follows: To study the need and importance of capital budgeting.

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To study the methods adopted by the organization in making capital budgeting decisions.

To understand the cost structure of the Stage III project.

To understand the revenue structure in case of power project in view of CERC (Central Electricity Regulatory Commission) Tariff & Expenditure in case of Thermal Power Plant and arrive at net cash flow.

Calculated Net Present value, Internal Rate of Return and Payback Period.

3. INDUSTRY PROFILE

3.1 OVERVIEW
The electricity sector in India supplies the world's 6th largest energy consumer, accounting for 3.4% of global energy consumption by more than 17% of global population. the Energy policy of India is predominantly controlled by the Government of India's Ministry of Power, Ministry of Coal and Ministry of New Renewable Energy and administered locally by Public Sector Undertakings (PSUs). With the growth of economy, the demand for energy has grown at an average of 3.6 per cent annually over the past 30 years. According to the Government of India
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estimates, the power requirement in the country will increase to 200,000 MW by 2012 and to 400,000 MW by 2020.

Almost 53 per cent of this capacity is based on coal, about 10 per cent on gas, 25 per cent on Hydro, 8 per cent on renewable sources, about 3 per cent on nuclear and 1 per cent on diesel. Due to the fast-paced growth of India's economy, the country's energy demand has grown an average of 3.6% per annum over the past 30 years. In December 2010, the installed power generation capacity of India stood at 165,000 MW and per capita energy consumption stood at 612 kWh. The country's annual energy production increased from about 190 billion kWh in 1986 to more than 680 billion kWh in 2006. The Indian government has set a modest target to add approximately 78,000 MW of installed generation capacity by 2012 which it is likely to miss. The total demand for electricity in India is expected to cross 950,000 MW by 2030.

3.1.1 Thermal Generation

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Even with full development of the feasible hydro potential in the country, coal would necessarily continue to remain the primary fuel for meeting future electricity demand. Imported coal based thermal power stations, particularly at coastal locations, would be encouraged based on their economic viability. Use of low ash content coal would also help in reducing the problem of fly ash emissions. Current installed capacity of Thermal Power as of February 28, 2011 is 111,324.48 MW which is 64.75% of total installed capacity. Significant Lignite resources in the country are located in Tamil Nadu, Gujarat and Rajasthan and these should be increasingly utilized for power generation. Lignite mining technology needs to be improved to reduce costs.

Use of gas as a fuel for power generation would depend upon its availability at reasonable prices. Natural gas is being used in Gas Turbine /Combined Cycle Gas Turbine (GT/CCGT) stations, which currently accounts for about 10 per cent of total capacity. Power sector consumes about 40per cent of the total gas in the country. New power generation capacity could come up based on indigenous gas findings, which can emerge as a major source of power generation if prices are reasonable. A national gas grid covering various parts of the country could facilitate development of such capacities.

4. COMPANY PROFILE.

4.1. NTPC OVERVIEW
NTPC Limited is the largest thermal power generating company of India. A public sector company incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 84.5% of the total equity shares of the company and the balance 15.5% is held by FIIs, Domestic Banks, Public and others. Within a span of 30 years, NTPC has emerged as a truly national power company, with power generating facilities in all the major regions of the country. Based on 1998 data,
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carried out by Data monitor UK, NTPC is the 6th largest in terms of thermal power generation and the second most efficient in terms of capacity utilization amongst the thermal utilities in the world.

In October 2004, NTPC launched its Initial Public Offering (IPO) consisting of 5.25% as fresh issue and 5.25% as offer for sale by Government of India. NTPC thus became a listed company in November 2004 with the Government holding 89.5% of the equity share capital. In February 2010, the Shareholding of Government of India was reduced from 89.5% to 84.5% through Further Public Offer. The rest is held by Institutional Investors and the Public.

4.1.1 Business of NTPC Ltd a The main activities of NTPC are setting up of power plants and power generation through its coal-based and gas-based power plants. The Company has also diversified into construction of hydro power plants and generation of hydro power besides trading and distribution of electricity. The Company is now entering into area of coal mining & coal washeries and oil exploration as well.

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The business portfolio of the company is: Power project construction Generation of Electric power Coal Mining and Coal washeries Distribution, trading of electricity, trading of ash and other related products through it’s wholly – owned subsidiaries. The total installed capacity of the company is 34,194 MW (including JVs) with 15 coal based and 7 gas based stations, located across the country. In addition under JVs, 5 stations are coal based & another station uses naphtha/LNG as fuel. The company has set a target to have an installed power generating capacity of 1, 28,000 MW by the year 2032. The capacity will have a diversified fuel mix comprising 56% coal, 16% Gas, 11% Nuclear and 17% Renewable Energy Sources(RES) including hydro. By 2032, non fossil fuel based generation capacity shall make up nearly 28% of NTPC’s portfolio.

NTPC has been operating its plants at high efficiency levels. Although the company has 17.75% of the total national capacity, it contributes 27.40% of total power generation due to its focus on high efficiency.

4.2. SWOT ANALYSIS STRENGTHS OF NTPC
The Company has kept with itself sufficient liquid funds to meet any kind of cash requirements.
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Efficient working capital of plant. Efficient growth with prospects of significant additions, modification and replacement. An early starter-more than 30 years experience in power sector. Highly motivated and dedicated workers and officers, no industrial relation problem.

WEAKNESSES OF NTPC
Low level of innovation NTPC don’t have coal linkages Some of the plant have become old and require investment in renovation and modernization.

OPPORTUNITY FOR NTPC
Demand and supply gap. Upcoming hydro and nuclear sector. Huge opportunity in consultancy service. Huge capital requirement for expansion, diversification, horizontal and vertical integration, and renovation & modernization.

THREATS FOR NTPC

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Limited experience of operating in a truly liberalized environment with competition. Rising prices of raw materials. Redirecting power may be constrained by inter regional connectivity.
Competitive Bidding of Tariff.

4.3. NTPC UNCHAHAR: AN OVERVIEW

Feroze Gandhi Unchahar Thermal Power Station NTPC Unchahar Vision To be the best Thermal Power Station of the Country in generating reliable and ecofriendly power, improving the quality of life of the community and employees, powering India’s growth!

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Some facts about the Station…

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Approved capacity Installed Capacity

1050 MW Stage I & II : 840 MW (2 x 210 + 2 x 210 MW) Stage III : 210 MW (1 x 210 MW) The site is located in the Rae Bareli district of Uttar Pradesh State, at a latitude of 25°15'N and a longitude of 81°19'E. It is bounded by villages Kanpur,

Location

Faridpur and Khaliqupur Kurd and is at a distance of approximately 3kms from Mustafa bad (present name: Unchahar) town on the Allahabad-Rae-Bareli BG section of Northern Railways. Unchahar is situated at Luck now Allahabad State Highway • 40 Km from Raebareli • 85 Km from Allahabad. • 120 Km from Lucknow Central Coal Field Limited (CCL) Bharat Cocking Coal Limited (BCCL) Sharda Sahayak Canal (Main Source) Dalmau Pump Canal (From River Ganga)(during closure of Sharda Sahayak canal) Unchahar Raebareli Line –1 , 2 & 3 (PGCIL) Unchahar Fatehpur- Line –1 & 2 (UPPCL) Unchahar Kanpur Line – 1,2,3 & 4 (PGCIL) UP, Uttaranchal, Haryana, HP, J&K, Chandigarh, Rajasthan, Delhi & NVVN Stage I & II : Rs.2337.09 Crores Stage III : Rs. 938.61 Crores 5x210 MW Unit Unit Unit Unit Unit I : 210 MW November 1988 II : 210 MW March 1989 III : 210 MW January 1999 IV : 210 MW October 1999 V : 210 MW September 2006 Punjab,

Approach

Coal Sources Water Sources

Power Evacuation (220 KV)
Beneficiary States Approved Cost Unit Sizes Units Commissioned

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Brief Profile of the Project The foundation stone of this project was laid by late Smt. India Gandhi, Ex Prime Minister of India on 27.06.81. National Thermal Power Corporation has taken over the Feroze Gandhi Unchahar Thermal Power Project from UPRVUN Ltd. having the capacity of 420 MW at a Plant Load Factor (PLF) of about 18% w.e.f. 13.2.92, now it is a 1050 MW power plant with PLF of more than 100%. The project is now amongst the top performing thermal power plants of the country and having the honor of beginning NTPC’s enviable track record in turning around the performances of stations it has taken over from SEBs through the adoption of effective project management and Operation & Maintenance practices. NTPC Unchahar turnaround has been wonderfully brought out in the book “India 2020 – A Vision for the New Millennium” by none other than the first citizen of our country, President A.P.J. Abdul Kalaam. In line with the HR Strategy of NTPC, the project believes that for achieving top class performance people management and continuous development of its human resources utilization. is an imperative. NTPC Unchahar is also committed to protect environment through a forestation, emission & efficient control and maximum ash

Operational structure of the organization NTPC Ltd. has a 3 tier structure comprising Corporate Centre (CC), Regional Headquarter (five in numbers – NCR, NR, SR, ER and WR) and Stations/Projects. The Board of Director is headed by the Chairman and Managing Director (CMD) and there are six functional Directors, two independent Directors yet to be nominated by the
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Government of India and four Independent Directors. The Regional Executive Directors (RED) report directly to the CMD. Feroze Gandhi Unchahar Thermal Power Project is one of the stations in Northern Region with head of the station, the General Manager (GM) report to RED (North). The functional heads at FGUTPS report to the GM. The Stage-I performance was improved to the level of other NTPC projects. Simultaneously the stage-II work was taken-up in 1994. The Unit-III and Unit-IV commissioned in Mar’2000 and Jan’2001 respectively. Now all five units are performing well. NTPC LIMITED-Unchahar has excellent record of accomplishment in the field of power generation and has surpassed Memorandum of Understanding targets set by Govt. of India every year. By attaining the best of station performances, the level of key parameters like station availability, ash utilization, auxiliary power consumption, specific oil consumption, coal and make-up water consumption, heat rate etc., achieved by NTPC-Unchahar are much superior to CEA norms and amongst the best on all India basis. In line with the HR Strategy of NTPC, the project believes that for achieving top class performance people management and continuous development of its human resources utilization. is an imperative. NTPC Unchahar is also committed to protect environment through a forestation, emission & efficient control and maximum ash

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Originally known as Feroz Gandhi Unchahar Thermal Power Project (FGUTPP), the foundation stone was laid in June 1981 for construction of 5 units of 210MW. This plant which was under Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited with 2 units of 210MW was handed over to NTPC on 13 February, 1992 becoming the first take over plant for NTPC and a challenge to bring in par with other NTPC projects, as it was performing poorly at a mere 18% PLF. FGUTPP performance from the time of takeover has been improving steadily and is now at par with other NTPC stations having achieved a PLF of 93.28% in the year 2010-2011.

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A brief profile of the FGUTPP project is shown below:Location Approach In Unchahar Tehsil, Raebareli District PIN-229406 On Lucknow Allahabad State Highway 120Km from Lucknow, 85Km from Allahabad and 35 Km from Raebareli. For Stage-I 1953 Acres including township. For Stage-II 250.7 Acres Stage-I 2x210MW. Stage-II 2x210MW, Stage-III 1x210MW CCL, BCCL, ECL – approx. 700 KM from the station. Around 14,000 MT per day for stage-I & II. Sharda Sahayak Canal (Main Source), Dalmau Pump Canal during shutdown of Sharda Sahayak Canal. Double circuit 220KV lines to Lucknow (UPPCL), double circuit line to Fatehpur (UPPCL), two double.

Land Area Station Capacity Coal Source Fuel requirement Water Source

Power Evacuation

History
NTPC has come a long way from the day when construction of its first pithead super thermal power project at Singrauli in Uttar Pradesh commenced. Here is a retrospective which chronicles NTPC’s achievements, year after year. Our Company was incorporated on November 7, 1975 under the Companies
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Act as a private limited company under the name National Thermal Power Corporation Private Limited, and the word 'Private' was deleted on September30, 1976 consequent upon the notification issued by the GOI Exempting government companies from the use of word 'private' in their name. On September 30, 1985, our Company was converted from a private limited company into a public limited company. Subsequently, the name of our Company was changed to its present name NTPC Limited and a fresh certificate of incorporation was issued on October 28, 2005. The name of our Company was changed to reflect the diversification of our business operations beyond thermal power generation to include, among others, generation of power from hydro, nuclear and renewable energy sources and undertaking coal mining and oil exploration activities. For further information on our business including description of our activities, services, market of each segment, our growth, technology, market, managerial competence and capacity built-up, our standing with reference to our prominent competitors. Our Company is not operating under any injunction or restraining order. In July 1976, the registered office of our Company was changed from Shram Shakti Bhawan, New Delhi to Kailash Building, Kasturba Gandhi Marg, and New Delhi. Subsequently, in May 1979 the registered office of Our Company was shifted to NTPC Square, 62-63, Nehru Place, New Delhi and thereafter in October 1988 to its present location for administrative and operational efficiency. Major events 1975- Incorporation of our Company. 1978 Takeover of management of the Badarpur project

1982 Commissioning of the first 200MW unit at Singrauli. Center for education at Power Management Institute, Delhi established First direct foreign currency borrowing a consortium of foreign banks led by Standard Chartered Merchant Bank extends a loan of GBP 298.41 million for the Rihand project.
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1984 The transmission line based on High Voltage Direct Current technology, commissioned for power transmission from Rihand to Delhi Singrauli project received World Bank loan of US$ 150 million through GoI. 1986 Synchronized first 500MW unit at Singrauli Our Company became one of the first PSUs to issue bonds in the debt market.

1987 5,000 MW installed capacity mark crossed. 1988 First syndicated Japanese loan of 30 billion JPY raised. 1989 Consultancy division of Our Company launched First unit (88 MW) of our Companys first gas based combined cycle power plant at Anta, Rajasthan commissioned. 1990 Total installed capacity of 10,000 MW reached.

1992 First acquisition by our Company of Feroze Gandhi Unchahar Thermal Power Station (2x210MW) from Uttar Pradesh Rajya Vidyut Utpadan Nigam of Uttar Pradesh The transmission systems owned by our Company were transferred to Power Grid Corporation of India Limited pursuant to legislation by the Parliament of India.

1993
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IBRD extended direct loan of US0 million to Our Company under time slice concept for its projects.

1994 15,000 MW of installed capacity achieved Maiden declaration of dividend of Rs. 650 million JhanorGandhar (Gujarat) becomes our first thermal power station to have commissioned an integrated Liquid Waste Treatment Plant.

1997 'Nirvana' status granted by the GoI100 billion units generation in one year achieved 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 350 MW.

1999 Our Companies Dadri thermal power project, Uttar Pradesh adjudged the best in India with a PLF of 96.12% Dadri thermal power project, Uttar Pradesh certified with ISO 14001.

2002 Three wholly owned subsidiaries, viz., NTPC Electric Supply Company Limited, NTPC Hydro Limited and NTPC Vidyut Vyapar Nigam Limited incorporated ESP [Electrostatic precipitators) set up at Talcher power plant 20,000 MW installed capacity mark exceeded.

2003
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Our Company undertook debt re-structuring. Raised funds through bonds (Series XIII and XIV) Construction of first hydro-electric power project of 800 MW capacity in Himachal Pradesh commenced after the investment Approval. 2004 The award of contract for the first Super Critical Thermal Power Plant at Sipat Reached a total installed capacity of 22,249 MW with the Talcher Unit V getting synchronized on May 13, 2004 Our Company Feroze Gandhi Unchahar Thermal station achieves a record PLF of 87.43% in current year up from 18.02% in February 92 when it was taken over by us LIC extends credit facility for Rs 70 billion. Rs. 40 billion is in the form of unsecured loans and Rs. 30 billion is in the form of bonds Our Company makes its debut issue of euro bonds amounting to USD 200 million in the international market First coal mining block allotted Listing of our Equity Shares on the Stock Exchanges.

2005 Our Company received the International Project Management Award 2005 for its Simhadri project at the International Project Management Association World Congress. Oil block allocated under NELP V Our Company adopted core values 'BCOMIT' (Business Ethics, Customer Focus, Organizational Pride, Mutual Respect and Trust, Innovation and Speed and Total Quality for Excellence). Our Company ranked as the Third Great Place to work for in India for second time in succession by a survey conducted by Grow Talent and Business World 2005.

2006 Badarpur Thermal Power Station having an installed capacity of 705 MW transferred to Our Company.

2007 MOC, GOI granted in-principle approval for allocation of a new Coal block, Chatti-Bariatu (South) to our Company subject to the conditions stipulated in the approval letter. The share of reserves is estimated to be 354 Million Tones. 2008 Our Company adjudged as the Star PSU – 2008 Board expanded by appointment of five independent Directors India Power Award conferred on Centre for Power Efficiency and Environmental Protection. 2009
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Memorandum of understanding entered into with the Nuclear Power Corporation of India Limited (NPCIL) for development of nuclear power in India 30,000 MW installed capacity mark crossed. Long term fuel supply agreement signed with Coal India Limited for supply of coal to our power stations for a period of 20 years. Our Company acquired 44.6% of presently paid-up capital of Kerala and Transformers and Electricals Kerala Limited from Government of Kerala at a total consideration of Rs. 313.4 million, subject to final price to be based on the valuation of the assets of Kerala and Transformers and Electricals Kerala Limited. Kerala and Transformers and Electricals Kerala Limited is engaged in manufacturing and repair of heavy duty transformers International Gold Star Quality Award conferred on Centre for Power Efficiency and Environmental Protection. - NTPC enters MOU with Nuclear Power Corporation of India Ltd. (NPCIL) to work together for development of Nuclear Power in India and for this purpose to form a Joint Venture Company for setting up Nuclear Power Projects.NTPC inks JV agreement with SAIL, RINL, Coal India and NMDC.

“The foundation stone of this project was laid by late Smt. India Gandhi, Ex Prime Minister of India on 27.06.81. National Thermal Power Corp. has taken over the Feroze Gandhi Unchahar Thermal Power Project from UPRVUN Ltd. having the capacity of 420 MW at a Plant Load Factor (PLF) of about 18% w.e.f. 13.2.92, now it is a 1050 MW power plant with PLF of more than 95%.”

NTPC Unchahar turnaround has been wonderfully brought out in the book “India 2020 –A Vision for the New Millennium” by none other than the first citizen of our country, President A.P.J. Abdul Kalam. The contents are as given below:

“Let us not overlook successes even in this gloomy situation. Unchahar thermal power station was acquired by NTPC from government of Uttar Pradesh. Performance was improved dramatically by using de-bottlenecking techniques. Prior to take over the Unchahar station had a PLF of 18% in six months thereafter it went up to 35.5% and in the twelve months to 73.7%! The availability factor which was 27% at the time of takeover went up to 49.5% six months later and about 79.5% after
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twelve months. Specific oil consumption, which is an indicative of wastage and inefficiency of operation which was at 21.8 %( ml) per Kilowatt hour at the time of takeover went down to 6.3 ml/Kwh in 12 months. These dramatic results have been obtained under ordinary or even oppressive circumstances and despite the absence of recognition by the system. While a days’ power breakdown or an audit report on delay or excessive project costs hits headlines, nobody even bothers to mention these achievements in a small column of a newspaper. Nor even is such achievement talked about by politicians or bureaucrats! We don’t know who are the heroes & heroines who made these achievements possible through teamwork!” The project is now amongst the top performing thermal power plants of the country and having the honour of beginning NTPC’s enviable track record in turning around the performances of stations it has taken over from SEBs through the adoption of effective project management and Operation & Maintenance practices.

NTPC Ltd. Unchahar has excellent record of accomplishment in the field of power generation and has surpassed Memorandum of Understanding targets set by Govt. of India every year. By attaining the best of station performances, the level of key parameters like station availability, ash utilisation, auxiliary power consumption, specific oil consumption, coal and make-up water consumption, and heat rate etc., achieved by NTPC-Unchahar are much superior to CEA norms and amongst the best on all India bases. Over the last five years, Indian economy has grown at a healthy rate of around 6 to 7%. The continued economic growth is indispensable in raising living standards across all strata of society and securing high rates of employment and creating opportunity for millions of others.

Feroz Gandhi Unchahar Thermal Power Project is one of the stations in Northern Region with head of the station, the General Manager (GM) report to RED (North). The functional heads at FGUTPP report to the GM. The detailed organization structure is shown below:

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5. Finance Department of NTPC, Unchahar
Finance department is “backbone” of any organization. The growth of all organization depends on effective & efficient finance management. In NTPC finance departments is divided into following section: STORE BILL SECTION Material supplied to the contractors as well as material supplied in plant is done through the medium of store bill section. The main instrument through which the payment and accounting of stores are carried out in this section are purchase orders, store receipt vouchers, store issue vouchers, price stores ledger, goods receipt, bank payment vouchers, material inwards slip purchase journal voucher etc. They all use Letter of credit with validity of 90 days in case the materials are procured from foreign sources. WORK BILL & CONCURRENCE SECTION All the contract bills, maintenance bills of plant & service bills are taken into consideration under this section & accounting of all the transaction of these bills are done in this section. Finance department checks the order of the required material & also checks the cost of material, availability of material & requirements of funds. This whole process is called concurrence & whole process look after by concurrence section. BUDGET & COMMERCIAL SECTION This section compiles revenue budget and capital budget with the help of various departments. It also certifies budget for clearing proposal for placing orders. Revenue or O&M budget includes employees cost, repairs and maintenance (including capital spares), station overhead. Under capital budgeting NTPC Unchahar maintain two types of budgets miscellaneous bought out assets (MBOA) and direct capital outlay budget (DCO). This section also prepares cost sheet, CARR reports and also prepares fuel price adjustment (FPA) for billing of energy through regional
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office. This section also accounts for energy billing. Annual Accounts are prepared and get audited by the book section.

FUEL ACCOUNTING SECTION This section majorly contributes to the expenditure pattern in running a thermal power station. Thermal plant requires two fuel coal and oil. Coal is the major and primary fuel and oil is the secondary fuel. This section deals with the accounting part that calculates how much amount is spent in procuring the coal both domestically and internationally, including the recovery charges.

CASH & BANK SECTION All type of payments related to banks or through cash is considered. Bills from different sections are meant for approval through this section.

ESTABLISHMENT SECTION This section is one of the crucial sections of the finance department. The main function of this section is to deal with employees’ related payment and their respective accounting procedure. The payment is made to employees accounting to their entitlement. There are approximately 1053 employees in Unchahar. The employees are categorized in three groups.
- Workmen - Supervisor - Executives

This section deals with the salaries of the employees. It also helps in releasing payment for TA, DA, and Medical through advances and also settlement of claims, loans, LTC and other benefits.
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6. CAPITAL BUGETING
The key function of the financial management is the selection of the most profitable assortment of capital investment; it is the most important area of decision making of the finance manager because any action taken by the manager in this area affects the working and the profitability of the firm for many years to come. The need of the capital budgeting can be emphasized by taking into consideration the very nature of the capital expenditure such as heavy investment in capital projects, long term implication, for the firm, irreversible decisions and complicates of the decision making. Its importance can illustrated on the following other grounds. (1) Unpredictable Nature of Forecast of Sales. The investment in fixed assets is related to future sales of the firm during the life time of the assets purchased. It shows the possibility of expanding the production facilities to cover additional sales shown in the sales budget. Any failure to make the sales forecast accurately would result in over investment or under investment in fixed assets and any erroneous forecast of asset needs may lead the firm to serious economic results. (2) Comparative Study of Alternative Projects. Capital budgeting makes a comparative study of the alternative projects for the replacement of assets which are wearing out or are in danger of becoming obsolete so as to make the best possible investment in the replacement of assets. For this purpose, the profitability of each project is estimated.

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(3) Timing of Assets-Acquisition. Proper capital budgeting leads to proper timing of assets-acquisition and improvement in quality of assets purchased. It is due to ht nature of demand and supply of capital goods. The demand of capital goods does not arise until sales impinge on productive capacity and such situation occurs only intermittently. On the other hand, supply of capital goods with their availability is one of the functions of capital budgeting. (4) Cash Forecast. Capital investment requires substantial funds which can only be arranged by making determined efforts to ensure their availability at the right time. Thus it facilitates cash forecast. (5) Worth-Maximization of Shareholders. The impact of long-term capital investment decisions is far reaching. It protects the interests of the shareholders and of the enterprise because it avoids over-investment and under-investment in fixed assets. By selecting the most profitable projects, the management facilitates the wealth maximization of equity share-holders.

6.1. Types of Budget in NTPC LTD Unchahar
There are three types of budgets prepared in NTPC Ltd Unchahar. a. Direct Capital Outlay Budget (DCO). b. Miscellaneous Bought out Asset (MBOA) c. Operation & Maintenance (O&M)

Direct Capital Outlay Budget (DCO)
DCO represents all costs directly identified with capital works and includes the following: Cost of land Infrastructure facilities Civil/mechanical /electrical works
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Township MGR and Construction facilities It pertains to a capital nature work which yields a return over a period of time usually exceeding one year. Benefits are in the form of either increased revenue or decrease in cost. For DCO budget F&A department gets the circular in the month of May and June. There are three stages in direct capital outlay budget:

• DCO-SATGE I or Renovation and Modernization (If a plant is older than 10 years then it comes under the head of Renovation and Modernization) • DCO-STAGE II • DCO-STAGE III

Miscellaneous Bought Out Asset (MBOA)
MBOA budgets are related to the investments of cash in the assets of the organization other than capital assets. That may be for the office, school, clubs, hospital, and canteens etc. which are situated within the NTPC Township. It involves a series of outlay of cash resources in return for an anticipation flow of future. In month of February F&A department get circular from CC to commence MBOA budget.

Operation& Maintenance (O&M)
O&M expense budget is divided majorly under three heads Employee cost, Repair &Maintenance and Station Overheads.

i. Employee Cost: This cost mostly include the wages & salary distributed to employees, medical claims and welfare expenses.
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ii. Repair & Maintenance: This is further divided into three components :Plant & Machinery: This includes routine expenditure and overhauling cost.

Building & other assets: Civil Construction work in Plant Area.

Township Assets: Civil Construction work in Township Area In all the cases, the cost is identified separately for the materials procured and the job done.

iii. Station Overhead Cost: This includes any expenditure incurred in Plant & Township other than the heads mentioned above like security expenses (salary given to CISF), chemical & store consumed, advertisement & publicity, Power charges (Revenue from the sale of ash at subsidized rate), etc.

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7. CALCULATION OF CAPITAL BUDGETING IN STAGE-III
The Feroze Gandhi Unchahar Thermal Power Project was originally conceived as a Load Center Power Station with an ultimate capacity of 1050 MW (2x210 MW + 3x210 MW) to be implemented in two stages by the Government of U.P. Stage-1 of the Project consisting of 2 units of 210 MW each were commissioned by UPRVUN in 1989. Subsequently, the project was taken over by NTPC w.e.f 13.02.1992. NTPC, after taking over the project, revised the scope of the project and accordingly, Stage –II of 420 MW (2x210 MW) capacity was implemented and commissioned in the year 1999. The units mentioned above are presently under commercial operation. However, the status of various inputs were reviewed again and thereafter, the ultimate capacity of the Project was proposed to be revised to 1050 MW. The StageIII is for addition of one unit of 210 MW. The investment approval for Stage-III of the project has been accorded in Nov 2003 at an estimate cost of Rs 939.28 Crores. Unit #5 has been synchronized in September, 2006. The unit is under commercial operation since 2007.

7.1. Cost Structure of a Project

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In giving a proposal the most important elements are how the final suggested figure is derived. Thus in case of Thermal Power Plant following are the seven package cost considered in order to arrive at final investment figure in case of project expansion. Since, land was already in position hence no investment was made for the acquisition of land for Stage-III NTPC, Unchahar. Main plant Expenditure: This expenditure includes the main plant building arrangement. Location of the AB bay area and BC bay area. It also it includes the expenditure of erection and maintenance of turbo-generators, locating the Boiler area which is a layout which keeps the boiler, air- pre heater and chimney in appropriate position and construction of Switch Yard area.

Ash Handling: Construction of Ash water Pump house, Ash slurry, ash water recirculation Pump house etc. for the ash generated during the operation of the thermal power station and utilizing the ash generated efficiently by making ash bricks.

Water Pre-Treatment Plant: This pre treatment plant is designed to remove suspended /colloidal matters in the raw water. This system requires a common chemical house that will store chemical such as chlorine, lime, alum/PAC & tanks etc for pre treatment.

General Civil Work: This expenditure includes the leveling and cutting of the site area where the unit is to be constructed .This also involves the building of all major foundations of equipments and structure which are supporting the TG,ID,PA&FD Fans. It also involves building of main power house, service building cum control room, mill building, conveyor galleries, cable & pipe racks.

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Chimney: Construction of one single flue lined reinforced concrete chimney top catering to one 210 MW of Stage-III of the project. The fuel gas emission point is 275 meters from the plants grade level.

Cooling Tower: Cooling tower is a RCC structure; it’s a separate building near main power house.

DM Plant: Construction of separate RCC structure for De-mineralization plant.

7.2. Calculation of Net Inflow Stage -III
The main earning source for NTPC is through tariff. The main purpose of the tariff is to cover the cost of the enterprise. When NTPC started there was only one part tariff which included only fixed charges and after that two part tariff was introduced which comprised both Annual Capacity Charges (fixed) and Energy Charges (variable). Currently, NTPC is following Availability based Tariff (ABT) as per 2009-2014 Tariff Act. In exercise of powers conferred under section 178 of the Electricity Act, 2003, and all the other powers enabling in this behalf. These regulations is called Central Electricity Regulatory Commission Regulation 2004.The current regulations have come into force on 1.04.2004, and unless reviewed earlier or extended by the commission, shall remain in force for the period of 5 years.
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7.2.1. REVENUE ON ACCOUNT OF FIXED CAHRGES
These charges are levied on SEBs to recover the Annual Fixed Cost (AFC) of a Generating Station which comprises the following components:

a) Return on equity: Return on equity shall be computed on pre-tax basis at the base rate of 15.5% which is to be grossed up at the applicable tax rate. So in case of NTPC, which is paying normal corporate tax @33.99%, the Rate of return on equity will be 15.50/ (1-0.3399) =23.481%.

b) Interest on loan capital: The repayment of loan shall be considered from the first year of commercial operation of the project and shall be equal to the depreciation allowed for that year. The rate of interest shall be the weighted average rate of interest calculated on the basis of the actual loan portfolio at the beginning of each year applicable to the project. In case of Stage III calculation we have taken Interest @8% and Period of repayment as 10 years. c) Depreciation: Depreciation shall be chargeable from the first year of commercial operation and the value base for the purpose of depreciation shall be the capital cost of the asset admitted by the Commission. Depreciation shall be calculated annually based on Straight Line Method @ 5.28% of the capital cost of the asset.

d) Interest on Working Capital: The working capital of Unchahar generating station shall cover:

Coal stock sufficient for two months generation.
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Oil stock sufficient for two months generation. Operation & maintenance expenses for one month. Maintenance spares @ 20% of O&M Expenses. Receivables equivalent to two months.

The Rate of interest on Working Capital for Unchahar generating station shall be equal to the short-term Prime Lending Rate of State Bank of India as on 01.04.2009. Interest on working capital shall be payable on normative basis notwithstanding that the generating company has not taken loan for working capital from any outside agency.

e) Operation & Maintenance expenses: The O&M expenses of Unchahar Generating Station shall be recovered based on the following recovery table provided by CERC for the current Tariff Period (2009-2014) irrespective of the actual O&M expenses incurred during the year :-

Year 2007-2008 2008-2009 2009-2010 2010-2011
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Recovery(Rs in Lakhs/ MW) 16.30 17.21
18.20 19.24

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2011-2012 2012-2013 2013-2014
20.34 21.51 22.74

f) Expenses on secondary fuel oil consumption: Expenses on secondary fuel oil shall be computed corresponding to normative secondary fuel oil consumption (SFC), in accordance with the following formula:

SFC*LPSF *NAPAF *24*NDY*IC*10
Where, SFC = Normative Specific Fuel Oil consumption in ml/Kwh LPSF = Weighted Average landed price of Secondary fuel in Rs/ml NAPAF = Normative Annual Plant availability factor in percentage NDY = Number of days in a year IC = Installed capacity in MW.

The revenue part of secondary fuel is reimbursed @ 1ML/KWH in the tariff while the actual consumption is less than 1ML/KWH. This reflects the efficiency of the usage of the secondary fuel. However this saving is to be shared equally with the state electricity board. Since, the revenue and the cost part of the secondary fuel is captured in the marginal contribution. Hence, no separate disclosure is for the same is made. g) Compensation allowance for Renovation & Modernization activities: The useful life of a coal based generating station like Unchahar is 35 years. So in order to increase the useful life of a project, certain renovation & modernization activities are needed to be performed for the project before its useful life is over. For this purpose, CERC has made a provision in tariff for a separate compensation allowance.

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Since Stage III has started its commercial operation since 2007, hence its life is less than 10 years. Hence while calculation we don’t consider Renovation & Modernization cost to calculate the recovery cost.

7.2.2. COST ON ACCOUNT OF FIXED COMPONENTS:

1. Operation & Maintenance: In calculation of cost on O&M starting four years data is taken and for 5th year the average of starting 4 years and increased by 6.5%. Thereafter for the following years the value is increased by 6.5%.

2. Depreciation: As per the CERC regulation plant is to be depreciated by 90% where as its useful life is of 25years. The depreciation rate @5.28% for the first 12 years and the balance depreciation should be spread over the remaining useful life of 13 years.

3. Interest on Loan: The interest of loan value is same as the revenue fixed component figure.

4. Interest on Working Capital & Return on Equity: Both are financed through internal accrual (Reserve & Surplus accumulated over the years). Hence, no cost is assigned to these in this model.

7.2.3. MARGINAL CONTRIBUTION ON ACCOUNT OF ITEMS OF VARIABLE NATURE
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The Contribution is the accruals on account of operational efficiency with vis-a-vav tariff norms. Example auxiliary power consumption allowed in tariff is 8.5%. However as per the historical data the auxiliary power consumption ranges between 7.5% and 8%. Because of operational efficiency Marginal Contribution is generated. Historically contribution for stage-III in Unchahar is approximately Rs17.5 Crores. The figure is kept constant over the useful life of the plant. The contribution is calculated as Contribution = Variable Revenue – Variable Cost This component is added to the Net Inflow on the account of Fixed Cost arrived after the deduction of Cost on account of the fixed components.

8. Findings & Analysis
The capital cost of Stage-III is Rs.939.28 Crores and the Capacity of Stage-III is 210 MW. Since NTPC according to CERC Act opts for 70% of the Capital Cost for Debt and the remaining 30% for the equity. Hence the Debt amounts to Rs.657.496 Crores and the equity amount is Rs. 281.784 Crores. Depreciation = Capital cost * 5.28% = Rs 49.59 Crores

The Net Cash flow for the 35 years of Plant life is shown in the Table 1.1. The calculation is divided as follows

Loan Calculation: The debt amount is calculated for 10 years. The Net average loan is calculated by taking the average of opening loan and closing loan.
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Revenue on account of fixed charges: As discussed in section 7.2.1

Cost on account of fixed components: As discussed in section 7.2.2

Marginal contribution on account of Items of Variable nature : As discussed in section 7.2.3

Net Present Value The Net Present Value (NPV) of a Capital Budgeting project indicates the expected impact of the project on the value of the firm. Projects with a positive NPV are expected to increase the value of the firm. Thus, the NPV decision rule specifies that all independent projects with a positive NPV should be accepted. When choosing among mutually exclusive projects, the project with the largest (positive) NPV should be selected.

The NPV is calculated as the present value of the project's cash inflows minus the present value of the project's cash outflows. This relationship is expressed by the following formula:

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Interpretation (for Table 1.2, given below)

Since the Net Present value calculated @10% for 35 year of cash flow is Rs 41.80 Crores is a positive return, hence the investment in Stage –III is a good & acceptable decision. When compared to investment of Rs939.28 Crores, the Net Present Value of Rs 41.80 Crores is less after 35years. The major reason for this behavior is more than proportionate increase in O&M expenses as compared to the O&M recovery in Tariff as shown in figure 1.1. The employee cost forms major part of O&M expenses. As the employee cost is higher than provided in Tariff, the net outflow in O&M expense is more.

NTPC Ltd is a PSU; hence the employee strength is fixed and cannot be reduced. The employee’s salaries are being increased every year with basic formula Basic + DA depending on the increase in inflation index. This results in stickiness of the employee cost component.

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Years 0 1 -939.28 114.34

Cash Flows

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2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Net present value

105.45 95.72 78.45 97.00 97.55 98.13 98.71 99.30 99.90 100.50 101.11 103.81 104.42 105.05 105.66 106.28 106.89 107.49 108.07 108.64 109.19 109.71 110.20 110.66 111.07 111.43 111.73 111.93 112.13 112.20 112.18 112.05 111.80 111.41 Rs. 41.80

Internal Rate of Return
The Internal Rate of Return (IRR) of a Capital Budgeting project is the discount rate at which the Net Present Value (NPV) of a project equals zero. When choosing

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among mutually exclusive projects, the project with the highest IRR should be selected.

The determination of the IRR for a project, generally, involves trial and error or a numerical technique.

Interpretation
The Internal Rate of Return for the Stage –III is 10.49% is higher than the historical cost of debt raised by NTPC which is 8% to 8.5% per annum. This includes the cost of domestic debt as well as the foreign debt (the exchange rate variation has been considered).

Since we have kept Return on Equity constant over the total life of the project. This assumption is taken on the ground of conservatism because there is no clear cut direction by CERC regarding the provision of change in Capital cost of the project in the future tariff period. Thus the constant ROE has pulled the NPV & IRR down because of the time value of money.

PAYBACK PERIOD
The Payback Period represents the amount of time that it takes for a Capital Budgeting project to recover its initial cost. The use of the Payback Period as a Capital Budgeting decision rule specifies that all independent projects with a Payback Period less than a specified number of years should be accepted. When choosing among mutually exclusive projects, the project with the quickest payback is preferred.

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Interpretation
Analyzing Figure 1.2 & Table 1.3, the Payback Period of the Stage-III NTPC Unchahar is 9.45 years. When we observe the Figure 1.2, we observe the investment line is linear. But in Reality the Capital cost is never constant in case of thermal power project. They tend to keep on increasing due to the addition capitalization during useful life of thermal power projects.

9. Recommendations
NTPC in order to cut down its operation cost it should adopt Lean Management and Six Sigma techniques.

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NTPC should try to procure cheaper machinery from foreign countries like China instead of being overly dependent on BHEL for supplies as discussed in the case study.

As discussed in the Case Study since Fuel accounts for 70% of the power generation cost. Private players like Adani Power, Reliance Power, Tata Power, JSW Energy and Lanco Infratech have taken key initiatives to secure fuel supplies by acquiring coal assets and picking up equity in mines abroad to improve their prospects of winning power projects through tariff bidding route. Thus NTPC should start acquiring coal mines instead of purchasing from companies like Coal India Limited. This will help NTPC to cut its operational cost and be more competitive.

NTPC can also increase the Variable component (Performance Related Pay) in their salary structure so they can cut down some of its cost related to employee cost in case of O&M expense.

NTPC should depend more on its internal accruals instead of relying on external

debt while going for expansion of exiting and setting of new projects. This will reduce the Overall cost of capital resulting in greater financial stability.

10. Conclusion
These researches highlight the importance of Capital Budgeting in an organization. In NTPC Ltd as it a Public Sector its most of the investment are in renovation,
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expansion and acquisition of new thermal plants. Stage-III of NTPC, Unchahar was commission in 2007 by increasing the capacity of Unchahar Thermal Power Station to 1050 MW. On calculation of the payback period is coming around 9.45 years. Since the investments are more capital intensive in case of thermal power plants, hence it takes longer time to recover the initial investment cost.

The Net Present Value of Stage-III NTPC, Unchahar is Rs 41.80 Crores. The reason of such low value of NPV is that major portion of O&M expense is Employee Cost which is considerably higher than the recovery in tariff. Hence this causes reduction in the cash outlays. However, the Internal Rate of Return (IRR) is 10.49% is higher than the historical cost of debt raised by NTPC which is 8% to 8.5% implying acceptability of the proposal of setting-up of Stage-III, NTPC Unchahar.

The assumption of constant value of Return of Equity (ROE) based on ground of conservatisms as CERC has no clear cut provision regarding the change in capital cost of the project in the future tariff period . Thus, constant ROE has pulled the NPV & IRR down because of the time value of the money.

NTPC Ltd has excellent management skill and expertise in energy sector. But in order to stay in competition with Private Players it needs to reduce its operation & maintenance cost.

11. Reference
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 http://www.studyfinance.com/lessons/capbudget/index.mv?page=01

 Annual Budget Reports

 www.ntpc.co.in

 Financial Management by Prasanna Chandra

 CERC Tariff Policy of 2009-2014.

 www.moneycontrol.com

 Indian Power Stations 2010 by NTPC

 Delegation of Power by NTPC

 Internal Management Reports

12. Annexure
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12.1 Abbreviation
ABT
CENPEEP Availability Based Tariff Centre for Power Efficiency & Environmental Protection Internal Return rate Net Present Value Central Electricity Regulatory Commission secondary fuel oil consumption Foreign Institutional Investor Dearness Allowance Integrated gasification combined cycle Kilo Watt hour Ultra Mega Power Projects Public Sector Undertakings of Government of India Government of India State Electricity Board Return on Equity Operation & Maintenance Memorandum Of Undertaking

IRR NPV CERC SFC FII DA IGCC KWH UMPP PSU GOI SEB ROE O&M MOU

13. Case Study: NTPC in Comparison to its Competitors in the Era of Competitive Tariff Bidding.
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Abstract
NTPC Ltd is the major company of the Indian power sector. It is involved in procurement, construction of power plants, their operation & maintenance and sale of electricity to distribution companies all over India. The Company has diversified its operations beyond thermal power segment and has added new business activities by way of forward, backward and lateral integration. 34,194 MW (including JVs) with 15 coal based and 7 gas based stations, located across the country. In addition under JVs, 5 stations are coal based & another station uses naphtha/LNG as fuel. The company has set a target to have an installed power generating capacity of 1, 28,000 MW by the year 2032.

The Electricity Act’2003 has removed entry barriers to different segments of electricity business with the objective of promoting competition. Trading and open access are being introduced in phases. Competitive bidding process for procurement of power from prospective developers has been introduced and states are inviting bid based on the competitive tariff. The government of India is promoting series of Ultra Mega Power Projects (UMPP) where project developer will be selected on the basis of tariff based competitive bidding. With the introduction of Tariff based competitive bidding, merchandising power projects, open access and other initiatives of new Electricity Act’2003, the complexion and contours of electricity market are undergoing substantial changes, accordingly NTPC is gearing up for leveraging emerging market opportunities.

The Study is carried out to highlight the issues and challenges for NTPC due to New Electricity Act’2003 allowing selection of bidder through tariff based competitive bidding, open access, merchandising power plants; government’s initiatives on Ultra Mega Power Projects (4000 MW each) to tide over the power crisis and promote competition in electricity sector; upcoming competition from private players; risks associated in execution of big projects. These issues have gained very high importance for NTPC in the context of its unprecedented growth plans in electricity market of India. In fact, these are now the issues of strategic importance for NTPC to have a competitive advantage against the other domestic as well as global players.
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The objective of study is to compare the NTPC standing position with its competitors in the era of competitive bidding tariff. Identify what are the various risks NTPC can face as of being a Government organization that it can lack behind in competitive tariff bidding.

Introduction of NTPC

NTPC Ltd is a “Maharatna” company. It is the largest thermal power generating company of India; a public sector company incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 84.5% of the total equity shares of the company and the balance 15.5% is held by FIIs, Domestic Banks, Public and others. Within a span of 30 years, NTPC has emerged as a truly national power company, with power generating facilities in all the major regions of the country. Based on 1998 data, carried out by Data monitor UK, NTPC is the 6th largest in terms of thermal power generation and the second most efficient in terms of capacity utilization amongst the thermal utilities in the world.

NTPC has been operating its plants at high efficiency levels. Although the company has 17.75% of the total national capacity, it contributes 27.40% of total power generation due to its focus on high efficiency.

Until recently, NTPC had been operating in an almost controlled environment and hardly had any competition from private sector power producers. Though, private sector companies like Reliance Energy, Tata Power and some other players were present but they could pose hardly any competition to NTPC because of huge demand supply gap and geographical isolation. The other central state power sector undertakings namely SEBs, NHPC, NPC Neveli Lignite could also not pose any competition to NTPC because of similar reasons.
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Market Structure of NTPC

Referring to the figure 1.1, the major market share of Energy Sector is held by NTPC i.e. 142, 2646.53 as of now. The largest Market Capital Structure indicates the large size of the Company. NTPC has well established Plant distribution and networks.

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Table 1.1 Competitors in Power Sector with the Market Capitalization

When we look at the figure 1.2, 50% of Market share is only of NTPC. This Indicates that NTPC have excess internal funds. Thus it qualifies for the funds rising with credit rating of AAA+. Hence NTPC dominates the Energy Sector with a net profit of Rs 9,102.59 Crores. None of the Competitors are near to sales record of Rs 9,102.59 Crores.

The higher profits indicate that NTPC has high internal funds and hence does not have any problems in raising funds both from domestic and international market. The sales record demonstrates that NTPC has well established distribution and network that it can increase it sales to a great extent. NTPC has 35 years of experience in the energy sector hence they have linkage and water sources near their plants. They do not require to work from scratch.

The Total Assets of Rs 101,521.10 Crores indicates that NTPC have the required infrastructure required for running of project in place. These all are the reasons to explain the dominant position of NTPC in energy sector.
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REGULATORY ENVIRONMENT IN INDIA
Electricity Act 2003: The New Era
It simplified administrative procedures by integrating the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948 and the Electricity Regulatory Commissions Act, 1998 into a single Act. The Electricity Act, 2003 is based on the principles of promoting competition, protecting consumers’ interests and providing power to all. The Act has freed the generation of electricity from licensing, and has liberalized the captive power policy. Moreover, it provides open access to transmission and distribution network, and has laid out the stringent penalties for power theft. The new legislation can usher in paradigm shifts in the power sector. Competition will be possible not just in generation, but also in every facet of the sector including distribution. Moreover, private sector investment will be facilitated by greater transparency that will come about.

The Electricity Act 2003 has removed entry barriers to different segments of the electricity business with the objective of promoting competition. Generation has been de-licensed and open access in transmission has been provided. Trading has been recognized as a distinct activity. Open access in distribution is being introduced in phases. The State utilities are being unbundled and corporatized for better performance and accountability. Power Regulatory Commissions have come out with notifications for open access and trading has emerged as a substantial market activity. CERC has come out with ‘Staff Consultation Paper’ on the establishment of a Power Exchange. The operation of the power system has been transformed with the Availability Based Tariff (ABT) regime and system discipline has been ensured.

The liberal captive and group captive regime foreseen under Electricity Act, 2003, should be realized on the ground. India’s liberal captive regime will not only derive economic benefits from availability of distributed generation but set competitive
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wheeling charges to supply power to group captive consumers. This will pave the way for open access to distribution networks.

Grids of various regions viz. North-East, East, North and West have been interconnected and are now operating in synchronous mode and Southern Region is connected through an asynchronous HVDC network. Establishment of inter -regional links and development of national grid has become a reality. Inter-regional power transfers are on the increase. This will facilitate not only exchange of power from surplus region to deficit region but also enable trading and development of electricity market, including merchant power plants.

Competitive bidding process for procurement of power from prospective power developers has been introduced and many States are inviting competitive bids. The Government of India is also promoting a series of ultra mega projects where the developers will be selected on the basis of tariff based competitive bidding.

COMPETITIVE BIDDING TARIFF
REDUCTION IN COST OF POWER: There is at present no level playing field between Central Power Sector PSUs and others. The tariff of the Central Power Sector PSUs is determined on the basis of costs and norms with a guaranteed 14/16% post tax return on equity. This tariff determination regime gives little incentive to be efficient. The private sector generators do not get the comfort of the payment security mechanism available to Central Power Sector PSUs under the TPA and the State power utilities do not get the assured post tax returns.

Competitive tariff bidding is level playing field for both private and public sector in awarding the contracts of UMPP (4000MW) projects. Initially government used to
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award the contracts directly to the Public Sector Companies and in order to get contract the Private players had to apply for various licenses and legal procedures. The competitive tariff bidding was introduced to promote low cost generation, which will benefit the consumers.

Tariff policy’2006 was formulated with objective to: a) Ensure availability of electricity to consumers at reasonable and competitive rates. b) Ensure financial viability of the sector and attract investments. c) Promote transparency, consistency and predictability in regulatory approaches across jurisdictions and minimise perceptions of regulatory risks. d) Promote competition, efficiency in operations and improvement in quality of supply. The Centre's new Power Tariff Policy has proposed that distribution licensees should procure all future requirement of power through a process of competitive bidding.

All generation and transmission projects (with the exception of one time capacity expansion of up to 50% of installed capacity of a generating plant) should be competitively built on the basis of tariff based bidding. Public Sector Undertakings shall also be encouraged to participate in such bids even though the tariff policy allows them a 5 year window wherein projects undertaken.

Tariff: The policy has also called for the introduction of multi-year tariff framework for both public and private utilities. "This would minimize risks for utilities and consumers promote efficiency and appropriate reduction of system losses and
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attract investments and would also bring greater predictability to consumer tariffs on the whole by restricting tariff adjustments to known indicators on power purchase prices and inflation indices," the policy said.

TYPES OF BIDDING
In cases where tariff continues to be determined on the basis of costs and norms, regulators may either adopt a return on equity approach or return on capital approach, whichever is considered better in the interest of consumers? In deciding the level of return provided, the regulator should inter-alia take into account the return available on long-term government bonds and reasonable risk premiums associated with equity investments.

The policy, which was cleared by the Union Cabinet recently, has also given the Central Electricity Regulatory Commission (CERC) the discretion to choose between the Return on Equity (RoE) and the Return on Capital Employed (RoCE) approach while setting the tariffs for a project. The policy, which is supposed to act as the broad guidelines for regulators while setting tariffs, also lays down a debt-equity ratio of 70:30 to be adopted for financing of future capital costs of projects. According to the policy, a two-part tariff structure should be adopted for all longterm power procurement contracts from generation projects.

Transmission: In the case of transmission, the policy calls for "a suitable transmission tariff framework for all inter – State transmission, including
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transmission of electricity across the territory of an intervening State as well as for conveyance within the State, needs to be implemented."

Distribution: In the case of power distribution, the policy asks State Electricity Regulatory Commissions to determine and notify the standards of performance of licensees with respect to quality, continuity and reliability of service to all consumers of the State. Distribution should be bid out on the basis of a distribution margin or paid for by a regulated distribution charge determined on a cost plus basis including a profit mark up as mentioned above.

Advantage to NTPC
The Company has kept with itself sufficient liquid funds to meet any kind of cash requirements. There no funds shortage, hence it comes under AAA+ credit rating Company. Hence, no problem in raising credit. Adequate working capital of plant. Expertise in O&M of the project which can prove beneficial in case UMPP. Efficient growth with prospects of significant additions, modification and replacement. An early starter-more than 30 years experience in power sector . Highly motivated and dedicated workers and officers, no industrial relation problem. NTPC has required expertise in the construction of a power project from erection till commissioning.

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Being a PSU, NTPC has easy access to government’s funds and hence there is no policy hindrance in its way. Established fuel linkage and water sources they don’t have to work from scratch. NTPC expertise in turnaround of the old power plants such as Talcher taken over from OSEB, Tanda from UPSEB efficient running of relatively newer plants like Unchahar and Badarpur taken over from State utilities/ central govt.

Disadvantage to NTPC
In increasingly global environment, real threat will come from MNCs who are having access to cheap funds and technological superiority. The new global scenario will force NTPC to rethink the strategy.

Private Sectors have access to cheaper technology from foreign countries like China with minimum time lags. Whereas in case of NTPC they have a running contract with BHEL. BHEL takes longer time to deliver the required machinery at a higher cost.

With the opening up of the sector, more and more players are keen to put up power plants because of new enabling regulatory mechanism. They will operate the plant with minimum overheads and flexible financing options. Source of fund especially from stock market are cheaper compared to public sector utilities. This is because of market perception that private sector can run business more efficiently.

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Being a Public Sector Company NTPC has to bear to certain rules & regulation formulated from time to time. Where private sectors has no such restrictions.

NTPC has to go through a formal route of tendering where the bids are invited from interested parties. Whereas in case of Private sector, they have independence of awarding contract without inviting any bids.

Recommendation
I. Backward Integration
For UMPP, coals from captive mines as well as imported sources are envisaged. It is opined that captive coal mines are cheapest source of coal in India. Further, collaboration with leading players in coal mining for technical expertise or joint venture with CIL is preferred option. In case of Susan UMPP, the captive coal mine is identified. NTPC can go ahead with collaboration or joint ventures route so that sourcing can be tied up. This is the cheapest option to NTPC. Fuel accounts for 70% of the power generation cost. Developers usually quote their fuel cost in escapable and non-escapable parts. The lower the quantity under escapable category, the more competitive would be the tariff bid. That means those with their own coal mines would be in a better position to quote a higher coal quantity under the non-escapable category.
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II. Forward Integration

The power sector is divided into three parts Generation, Transmission and Distribution. As a part of forward integration NTPC can starts its own Transmission unit like Power Grid. Hence it will be in both Generation and Transmission. Since previously Power Grid was part of NTPC. Hence, NTPC has experience in this area and can in more competitive passion by grabbing this opportunity.

III. Joint Venture
NTPC can adopt the joint venture route along with the private players in case of the UMPP. In this NTPC will have access to the new technology and there will be resource & assets sharing between the companies. Hence this will lead to the cheaper bidding of tariffs.

IV. New technology
NTPC should take lead in new technologies like supercritical, IGCC, PFBC etc. As NTPC is leading power Sector Company, hence, people look towards NTPC for new technologies. NTPC will also be able to mitigate the risks associated with new technologies seeing its wider base. Further, NTPC can take lead role in CDM programmers so that some extra profit can be earned from the carbon credits. UMPP provides right opportunity to NTPC for adoption new efficient and environment friendly technologies.
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Worldwide, new technologies are available not only in turbine and boiler area but also in the coal mining, oil / gas exploration. The new technologies will help in reducing the tariffs as power plants can operate on higher efficiency on sustainable basis for long time.

Conclusions
Thus it’s high time that NTPC should modify its strategies to compete in the era of the competitive tariff bidding. Competitive tariff bidding is a step in direction of total de-regulation of the electricity sector. The mantra is simple that “Consumer is King”. Further, to stay competitive in global market, every organization has to transform itself to new business models; otherwise, competitive forces will make organization redundant.

To achieve sustainable competitive advantage, NTPC has to think not only in terms of engineering excellence, operational excellence or excellence in project execution. NTPC have to invent new business model catering to the need of present stakeholders.

Reference:
• www.ntpc.co.in • www.moneycontol.com • www.psuindia.in • Tariff based Competitive-bidding Guidelines for Transmission Service

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”Capital Budgeting Of Stage III NTPC Unchahar”

NTPC Ltd, Unchahar.

Student’s Name: MOHAMMAD ANAS Industry Guide: Mr.P.Gopal Ranga Faculty Guide: Mr. Gaurav Agrawal Understanding of the integrity involved in a capital budgeting decision is very important for a finance person. The project revolves around the factors which are important for capital budgeting decision. In a capital intensive industry like power not only the capital investment is very high but it has got long gestation period and even longer payback period. NTPC being the largest power utility in India is very important to nation as such because India is a power deficit country and significant part of capacity addition is expected to come from NTPC. Completion of project ontime or before-time is important due to (i). It start generating revenue and hence profit before schedule. (ii). The incidental expenditure during construction like interest outgo is minimized.

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14. SYNOPSIS
Power sector is attracting a lot of capital because of assured Return on Equity. However the scenario has changed from 5th January 2011, where the generator has to bid for any Greenfield Project. This brings the set of challenges to NTPC which has got a high cost structure and is not strong footed and responsive like private counterparts. The backward integration also poses lot of challenges to NTPC. A successful backward integration can only ensure the raw material security and price competitiveness of the electricity generated. In case of merit order dispatch which is bounded to arrive in future.