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`One-time settlement scheme will help us greatly' — Mr Narasimharamulu, Director (Finance), NTPC

Raghuvir Srinivasan


Mr Narasimharamulu

THE Rs 20,000-crore National Thermal Power Corporation is one of the largest utilities in the country today. Managing the finances of such a big organisation is no small job, especially considering that outstanding dues from customers is almost as high as the turnover itself. The man doing that job, Mr Narasimharamulu, Director (Finance), spoke to Business Line recently on the complex financial issues facing NTPC. Excerpts:

The biggest issue facing you today is the advent of availability-based tariff (ABT). Could you explain the impact of the ABT order on your finances?

The ABT order is affecting our income and cash flows. Income is affected because of a change in the fixed charges recovery pattern. Earlier, we used to recover full fixed charges at 68.5 per cent PLF but under the ABT, it will be at 80 per cent. Availability means that you should be capable of generating up to 80 per cent throughout the year. Earlier, there was an incentive of 1 paise per kW/hour for every per cent between 68.5 per cent and 80 per cent, which was over and above the recovery of full fixed charges. Now that is gone, which is a loss of income for us. That 11.5 paise per kW/hour is now zero at 80 per cent PLF from where the incentive zone begins. Now we will get a maximum of 21 paise per kW/hour for generation over 80 per cent and up to 90 per cent PLF. Beyond 90 per cent we will get half of this. 80 per cent PLF is a very high performance level; our average is itself only at that level. If we are unable to achieve 80 per cent PLF for some reason we will not get any incentive which we used to get earlier. We have estimated that our loss due to the absence of incentives is about Rs 500 crore per annum based on 2001-02 figures. This is a loss of income for us.

We have been classified such that all our plants will be operating always at 80 per cent. This is against any benchmark of machine performance. Nowhere in the world will machines have performed like this.

The second point is on disincentives. We have to operate our plants necessarily at 80 per cent PLF. There are disincentives if we operate at, say, 68.5 per cent only. Disincentive is about 11 times higher than the incentive we get at 80 per cent. Assuming we operate at 70 per cent, our fixed cost recovery will be proportionately lower. Since it is calculated at 80 per cent, we will lose 1/8 of fixed charges. We will suffer from under-recovery of fixed costs as all our plants cannot be operating at 80 per cent at all times. We can try and avoid this but it is a difficult task to ensure machine operation at 80 per cent throughout the year. There is a big risk of losing by way of disincentives. There maybe just about three or four stations in India operating consistently at 80 per cent.

The CERC has also issued an order on tariff norms. How does that impact you?

The order has changed the depreciation element in the tariff. Earlier, the Government used to notify the rates of depreciation. Coal-based stations were given accelerated depreciation at 7.8 per cent. The CERC has now slashed the depreciation rates to 3.6 per cent. We would lose about Rs 1,250 crore per annum due to this. The order has also modified operation and maintenance (O&M) expenses which is part of the tariff. Based on last year's figures we would lose about Rs 400 crore due to the change in the norm. Our sum total loss of income due to ABT and the new tariff order will be about Rs 2,100 crore based on last year's numbers. What is your typical cash flow generation in a given year and how do you deploy it? Does NTPC use cash credit support for working capital?

Last year, which was the first one after the CERC orders, we had a gross cash flow of about Rs 4,900 crore against Rs 6,050 crore in the year before that. We used Rs 2,010 crore out of internal resources towards increase in debt from SEB's while the year before that it was Rs 3,500 crore. We typically fund projects on a 70:30 debt-equity pattern. Due to the outstanding dues, we have had to rely on borrowings more. We have Rs 16,000 crore blocked in dues from SEB's as on date. We have been able to tolerate this situation because we did not need funds for capacity expansion; for about 2-3 years, we did not add much capacity. We have been cash surplus from 1996 and have not felt the need for cash credit at all. What is caught in dues is the return on equity and depreciation components of our tariff.

Will the one-time settlement of dues framed now help you?

The scheme will help us greatly. The quality of the asset- the dues- will now improve. Earlier it was dependent on the SEBs' ability to pay whereas the security we are now getting is first-class State Government bonds issued and serviced by RBI. Besides, the interest that we earn from this (8.5 per cent) is also tax-free. The bonds will be locked in for 5 years after which a tenth of the bonds will be redeemed every year. 10 per cent of the bonds are tradable every year which means that we can sell 50 per cent of our holdings in five years' time. This means that we can generate about Rs 1,400 crore every year (10 per cent of Rs 14,000 crore outstanding) from selling these bonds, which will aid our cash flow tremendously. This will add to the full realisation of sale proceeds (in future), which will take the total cash flows to about Rs 2,400 crore. This will mean that we can borrow Rs 6,000 crore on this which will make it a total of Rs 8,500 crore available to me for capital expenditure in a given year. The scheme will change the class of asset from sundry debtors to investments and finally to fixed assets.

What is your typical borrowing in a year and what is the average rate you pay?

We contract loans in a given year but the drawals will be based on the progress of the project concerned. We issue bonds whenever necessary. Recently, we privately placed Rs 2,500 crore for capital expenditure purposes. We placed the last tranche of Rs 500 crore in July last at 8.05 per cent. The issue was over-subscribed 12 times. Our average rate of borrowing is 8.7 per cent. We replaced costly debt of Rs 1,500 crore borrowed at 14-17 per cent with bonds of 9.55 per cent only leading to a savings of Rs 427 crore over the term of the borrowing.

Do you think that the present two-part tariff system is unsuitable for a free power market?

Today, there is no free market for power but it is bound to develop in the next decade. When markets develop, free pricing will automatically come in as it will be cumbersome to determine tariffs plant-wise. It will become extremely difficult to administer when a generator like NTPC which has 20 plants comes up with 20 different tariffs. So free pricing will come in but we are not ready for it yet. I would think by the end of this decade we would have developed a free market for power when pricing will also be freed.

What is your experience in managing the working capital of a big utility like NTPC?

It is challenging, no doubt. More so because of the amount of money held up with State electricity boards. But the slowdown in our projects in recent times has helped. We have working capital limits with banks of up to Rs 1,500 crore which we have not used. Our fuel costs are fully recovered from the tariff and so is interest, which is also a pass-through item. Our debt-equity ratio is very favourable at just 0.4. Assuming a debt-equity ratio of 2:1 for new projects we can raise about Rs 55,000 crore as loans. On the whole balance sheet this would be either 1 or less than 1.

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