IIP report on GMR Financial Results Analysis

Financial Performance and Analysis GMR Energy Limited

EXECUTIVE SUMMARY

Availability of power is one of the important ingredients for industrial growth. It is an important

infrastructure facility without which no industrial activity can be thought of in modern

times. Increasing automation of Indian industries has created huge demand of power in India.

This huge demand has resulted into demand supply gap in India in recent times. This report is

based on the study of the power sector in India as well as the performance and analysis of GMR

Energy Limited.

The objective of this report is to get a comprehensive and apparent knowledge of the power

sector, and to study the changes in power sector over a period of time there by analyzing various

aspects of the power sector. In the report comparative study of the performance of GMR Energy

Limited with respect four other companies under the same industry have been done. This study

also helps in knowing in which position the company GMR is in comparison with the major

players.

The NTPC, Reliance Infra, Tata Power, & Power Grid are the market leaders in the power sector

and have high Cumulative Annual Growth Rate (CAGR). This is because of the government

support, inflow of foreign investment, growing demand and use of latest technology for power

generation and transmission. The best management policies are adopted by these companies.

This will help GMR in analyzing what all are the steps they have to take into consideration to

reach into such a position.

The methodology used in report includes comparative analysis of the top 4 companies of

the sector with the company GMR Energy Limited as well as the ratio analysis of the company

with respect to the industry average. The Potter‘s five forces analysis and SWOT analysis are

used to analyze the industry of power sector. The various analysis shows that there has been a

continuous growth in generation and consumption of power in India. But still it is not able to

match the demand with the supply.

Thermal, hydro and nuclear are three major source of power generation From the installed

capacity of only 1,362mw in 1947, has increased to 97000 MW as on March 2000 which has

since crossed 100,000 MW mark India has become sixth largest producer and consumer of

Alliance Business School Page 1


electricity in the world equaling the capacities of UK and France combined. The number of

consumers connected to the Indian power grid exceeds is 75 million. Rural electrification is one

significant initiative of the industry to trigger economic development and generate employment

by providing electricity as an input for productive uses in agriculture and rural industries, and

improve the quality of life of the rural people.

The International Energy Outlook 2006 (IEO2006) projects strong growth for worldwide energy

demand over the 27-year projection period from 2003 to 2030. Much of the growth in energy

demand is among the developing countries in Asia, which includes China and India; demand in

the region nearly triples over the projection period. Total primary energy consumption in the

developing countries grows at an average annual rate of 3.0 percent between 2003 and 2030. In

contrast, for the developed countries—with its more mature energy-consuming nations—energy

use grows at a much slower average rate of 1.0 percent per year over the same period. This huge

increase in projected demand of energy in India and China makes analysis of energy sector of

these countries very important.

World electricity generation rose at an average annual rate of 3.7% from 1971 to 2004, greater

than the 2.1% growth in total primary energy supply. Total world consumption of marketed

energy is projected to increase by 50 percent from 2005 to 2030.



1.1INTRODUCTION

An economy‘s growth, development, ability to handle global competition is all dependent on the

availability, reliability and quality of the power sector. As the Indian economy continues to surge

ahead, electrification and electricity services have been expanding concurrently to support the

growth rate. The demand for power is growing exponentially and the scope of growth of this

sector is immense.

Existing generation suffers from several recurrent problems. The efficiency and the availability

of the coal power plants are low by international standards. A majority of the plants use low-

heat-content and high-ash unwashed coal. This leads to a high number of airborne pollutants per

unit of power produced. Moreover, past investments have skewed generation toward coal-fired

power plants at the expense of peak-load capacity. In the context of fast-growing demand, large

T&D losses and poor pooling of loads at the national level exacerbate the lack of generating

capacity.

India is one of the main manufacturers and users of energy. Globally, India is presently

positioned as the 11th largest manufacturers of energy. It is also the worlds‘6th largest energy

users. In spite of its extensive yearly energy output, Indian power sector is a regular importer of

energy because of huge disparity.

Global and Indian economy have decelerated, but power is one of the few commodities in short

supply in India. So, despite the sluggishness in production and demand for manufactured

products, India remains power hungry, both in terms of normal and peak power demand. Power

is derived from various sources in India. These include thermal power, hydropower or

hydroelectricity, solar power, biogas energy, wind power etc. The distribution of the power

generated is undertaken by Rural Electrification Corporation for electricity power supply.



1.2 GLOBAL OVERVIEW

The energy required to support our economies and lifestyles provides tremendous convenience

and benefits. Energy consumption is reportedly higher in countries where less than 5 % of the

population lives below the poverty line than it is in countries where most people live in poverty

-- four times higher. For example, Americans make up less than 5 % of the world‘s population

yet consume 26 % of the world‘s energy. World electricity generation rose at an average annual

rate of 3.7% from 1971 to 2004, greater than the 2.1% growth in total primary energy supply.

This increase was largely due to more electrical appliances, development of electrical heating in

several developed countries and rural electrification programmes in developing countries.

De-regulation in areas of the global energy markets has led to fierce competition. Now more than

ever electricity has to be produced at a lower cost with many countries imposing ever tightening

environmental legislation to reduce the impact power generation has on the environment. The

enormous challenges are recognized in providing electricity as efficiently as possible and strive

to develop technology to meet your needs. Collectively, developing countries use 30% of the

world's energy, but with projected population and economic growth in those markets, energy

demands are expected to rise 95 %. Overall global consumption is expected to rise 50 % from

2005 to 2030.

World energy consumption is projected to expand by 50% from 2005 to 2030 in the IEO2008

reference case projection. Although high prices for oil and natural gas, which are expected to

continue throughout the period, are likely to slow the growth of energy demand in the long term,

world energy consumption is projected to continue increasing strongly as a result of robust

economic growth and expanding populations in the world‘s developing countries. Energy

demand in the OECD economies is expected to grow slowly over the projection period, at an

average annual rate of 0.7%, whereas energy consumption in the emerging economies of non-

OECD countries is expected to expand by an average of 2.5 % per year.



China and India—the fastest growing non-OECD economies—will be key contributors to world

energy consumption in the future. Over the past decades, their energy consumption as a share of

total world energy use has increased significantly. In 1980, China and India together accounted

for less than 8 % of the world‘s total energy consumption. In 2005 their share had grown to 18%.

Fig1.1: world’s total consumption by fuel



Even stronger growth is projected over the next 25 years, with their combined energy use more

than doubling and their share increasing to one-quarter of world energy consumption in 2030 in

the IEO2008 reference case. In contrast, the U.S. share of total world energy consumption is

projected to contract from 22 % in 2005 to about 17 % in 2030. Energy consumption in other

non-OECD regions also is expected to grow strongly from 2005 to 2030, with increases of

around 60 % projected for the Middle East, Africa, and Central and South America. A smaller

increase, about 36 %, is expected for non-OECD Europe and Eurasia (including Russia and the

other former Soviet Republics), as substantial gains in energy efficiency result from the

replacement of inefficient Soviet-era capital stock and population growth rates decline.

Oil for power generation has been displaced in particular by dramatic growth in nuclear

electricity generation, which rose from 2.1% in 1971 to 15.7% in 2004. The share of coal

remained stable, at 40% while that of natural gas increased from 13.3% to 19.6%. The share of

hydro-electricity decreased from 23.0% to 16.1%. Due to large programmes to develop wind and

solar energy in several OECD countries, the share of new and renewable energies, such as solar,

wind, geothermal, biomass and waste increased. However, these energy forms remain limited: in

2004, they accounted for only 2.1% of total electricity production. The share of electricity

production from fossil fuels has gradually fallen, from just under 75% in 1971 to 66% in 2004.

This decrease was due to a progressive move away from oil, which fell from 20.9% to 6.7%.



Fig 1.2: world’s total consumption by region



Electricity Generation by Fuel:

Fig 1.3: world’s electricity generation by fuel



1.3 Power Sector in India

The process of electrification commenced in India almost with the developed world, in the

1880s, with the establishment of a small hydroelectric power station in Darjeeling. However,

commercial production and distribution started in 1889, in Calcutta (now Kolkata). In the year

1947, the country had a power generating capacity of 1,362 MW. Generation and distribution of

electrical power was carried out primarily by private utility companies such as Calcutta Electric.

Power was available only in a few urban centers; rural areas and villages did not have electricity.

After 1947, all new power generation, transmission and distribution in the rural sector and the

urban centers (which was not served by private utilities) came under the purview of State and

Central government agencies. State Electricity Boards (SEBs) were formed in all the states.

Legal provisions to support and regulate the sector were put in place through the Indian

Electricity Act, 1910. Shortly after independence, a second Act - The Electricity (Supply) Act,

1948 was formulated, paving the way for establishing Electricity Boards in the states of the

Union.

In 1960s and 70s, enormous impetus was given for the expansion of distribution of electricity in

rural areas. It was thought by policy makers that as the private players were small and did not

have required resources for the massive expansion drive, the production of power was reserved

for the public sector in the Industrial Policy Resolution of 1956. Since then, almost all new

investment in power generation, transmission and distribution has been made in the public

sector. Most of the private players were bought out by state electricity boards.

From the installed capacity of only 1,362mw in 1947, has increased to 97000 MW as on March

2000 which has since crossed 100,000 MW mark India has become sixth largest producer and

consumer of electricity in the world equaling the capacities of UK and France combined. The

number of consumers connected to the Indian power grid exceeds is 75 million.



India's power system today with its extensive regional grids maturing in to an integrated national

grid, has millions of kilometers of T & D lines criss-crossing diverse topography of the country.

However, the achievements of India's power sector growth looks phony on the face of huge gaps

in supply and demand on one side and antediluvian generation and distribution system on the

verge of collapse having plagued by inefficiencies, mismanagement, political interference and

corruption for decades, on the other. Indian power sector is at the cross road today. A paradigm

shift is in escapable- for better or may be for worse.

1.4 EMERGENCE OF REGIONAL POWER SYSTEMS

In order to optimally utilize the dispersed sources for power generation it was decided right at the

beginning of the 1960‘s that the country would be divided into 5 regions and the planning

process would aim at achieving regional self sufficiency. The planning was so far based on a

region as a unit for planning and accordingly the power systems have been developed and

operated on regional basis. Today, strong integrated grids exist in all the five regions of the

country and the energy resources developed are widely utilised within the regional grids.

Presently, the Eastern & North-Eastern Regions are operating in parallel. With the proposed

inter-regional links being developed it is envisaged that it would be possible for power to flow

anywhere in the country with the concept of National Grid becoming a reality during 12th Plan

Period.

1.5 CURRENT SCENARIO AND OPPORTUNITIES AHEAD

Generation

India has the fifth largest generation capacity in the world with an installed capacity of 152 GW

as on 30 September 2009, which is about 4 percent of global power generation. The top four

countries, viz., US, Japan, China and Russia together consume about 49 percent of the total

power generated globally. The average per capita consumption of electricity in India is estimated

to be 704 kWh during 2008-09. However, this is fairly low when compared to that of some of the

developed and emerging nations such US (~15,000 kWh) and China (~1,800 kWh). The world



average stands at 2,300 kWh. The Indian government has set ambitious goals in the 11th plan for

power sector owing to which the power sector is poised for significant expansion. In order to

provide availability of over 1000 units of per capita electricity by year 2012, it has been

estimated that need-based capacity addition of more than 100,000 MW would be required. This

has resulted in massive addition plans being proposed in the sub-sectors of Generation

Transmission and Distribution.

Transmission

The current installed transmission capacity is only 13 percent of the total installed generation

capacity. With focus on increasing generation capacity over the next 8-10 years, the

corresponding investments in the transmission sector is also expected to augment. The Ministry

of Power plans to establish an integrated National Power Grid in the country by 2012 with close

to 200,000 MW generation capacities and 37,700 MW of inter-regional power transfer capacity.

Considering that the current inter-regional power transfer capacity of 20,750 MW, this is indeed

an ambitious objective for the country.

Distribution

While some progress has been made at reducing the Transmission and Distribution (T&D)

losses, these still remain substantially higher than the global benchmarks, at approximately 33

percent. In order to address some of the issues in this segment, reforms have been undertaken

through unbundling the State Electricity Boards into separate Generation, Transmission and

Distribution units and privatization of power distribution has been initiated either through the

outright privatization or the franchisee route; results of these initiatives have been somewhat

mixed. While there has been a slow and gradual improvement in metering, billing and collection

efficiency, the current loss levels still pose a significant challenge for distribution companies

going forward.

Central and State Utilities Dominate the Industry

The entire value chain of the power sector is dominated by the central and state sector utilities.

For instance, in the generation space, out of the overall capacity of 152 GW, the share of central

and state utilities stands at 49.8 GW and 76.6 GW, respectively; and that of private sector stands



at 25.8 GW. Even, of the 78.7 GW planned capacity additions during the 11th five-year-plan,

central and state utilities together are estimated to add nearly 63.7 GW.

The story remains pretty much the same in power transmission and distribution space. The

central and the state utilities own nearly 40 percent and 60 percent, respectively of the total

transmission lines of 2.7 million circuit kilometers (ckm). Power Grid Corporation of India Ltd

(PGCIL), the central transmission utility (CTU), is the largest transmission company in India.

Similarly, in distribution, the SEBs own nearly 95 percent of the distribution network.

Regulations are evolving and paving the way for greater private sector participation

Being a highly regulated sector, not surprisingly policies and regulations are playing a pivotal

role in the development of this sector. Over the years, the government has realized the

importance of the private sector participation. The Electricity Act, 2003 was a turning point in

the reforms process which removed the need for license for generation projects, encouraged

competition through international competitive bidding, identified transmission as a separate

activity and invited a wider public and private sector participation among other things.

Some of the other major reforms that have been implemented over the years include: unbundling

of SEBs, tax benefits, Accelerated Power Development and Reform Program (APDRP) for

distribution, permission for trading of power, etc7. Furthermore, the National Tariff Policy of

2006 encouraged private investment in the transmission sector through competitive bidding. In

addition, the allocation of captive coal blocks to private companies was one of the many

noteworthy reforms, increasing the fuel security for the end use project.

Aided by the ambitious plan to add around 78.7 GW of additional generation capacity in the 11th

plan by the year 2012, according to CRISIL Research estimates, about INR 7,50,000 crore is

likely to be invested in the power sector over the next five years by 2013-14. Of this, INR

480,000 crore is expected to be invested in the power generation space. Nearly half of the

investments in the power generation space are likely to be made by the private sector. Along

with generation this has opened up opportunities in the transmission sector as well. In order to



encourage private sectors in transmission line business, Government of India issued guidelines

for private sector participation.

These developments have given rise to new opportunities for the private sector especially in the

power generation space. As a result, there have been a plethora of new projects announced by the

private sector companies many of whom are negligible or have no prior experience in this sector.

This has given birth to the adage of Plans vs. Plants by clearly distinguishing between growth

and value utilities.

The new entrants in this sector face a number of challenges relating to the project execution, fuel

security, power equipment capacities, infrastructure constraints, etc. The purpose of this dossier

is to present a high level overview of the key challenges and the risk factors.

1.6 STRATEGIES

The various strategies followed to achieve the goal in power sector are:

Power Generation Strategy with focus on low cost generation, optimization of capacity

utilization, controlling the input cost, optimization of fuel mix, Technology up gradation and

utilization of Nonconventional energy sources.

Transmission Strategy with focus on development of National Grid including Interstate

connections, Technology up gradation & optimization of transmission cost.

Distribution strategy to achieve Distribution Reforms with focus on System up gradation, loss

reduction, theft control, consumer service orientation, quality power supply commercialization,

Decentralized distributed generation and supply for rural areas.

Regulation Strategy aimed at protecting Consumer interests and making the sector

commercially viable.

Financing Strategy is to generate resources for required growth of the power sector.



Conservation Strategy to optimize the utilization of electricity with focus on Demand Side

management, Load management and Technology up gradation to provide energy efficient

equipment gadgets.

Communication Strategy for political consensus with media support to enhance the general

public awareness.

To achieve the above objectives National Electric Policy has been designed. To fulfill the

objectives of the NEP, a capacity addition of 78,577 MW has been proposed for the 11th plan.

This capacity addition is expected to provide a growth of 9.5 % to the power sector. The Tenth

Plan for fiscal years 2002 to 2007 targeted a capacity addition of 41,110 MW, which was

subsequently revised to 30,641 MW; however at the end of the Tenth Plan period, only 21,180

MW of capacity was added. This shows that India is not upto the mark in achieving the targets of

generation. Our planning is perfect but our path to achieve the target is not perfect.

1.7 FUTURE PLANS FOR POWER FOR ALL BY 2012

The country‘s transmission perspective plan for eleventh plan focuses on the strengthening of

National Power Grid through addition of over 60,000 ckm of Transmission Network by 2012.

Such an integrated grid shall carry 60% of the power generated in the country. The existing inter-

regional power transfer capacity is 17,000 MW, which is to be further enhanced to 37,000 MW

by 2012 through creation of “Transmission Super Highways”. Based on the expected generation

capacity addition in XI plan, an investment of about 75,000 Crore is envisaged in Central Sector

and Rs. 65,000 Crore is envisaged in the State Sector.

POWERGRID is working towards achieving its mission of ―Establishment and Operation of

Regional and National Power Grids to facilitate transfer of power within and across the regions

with reliability, security and economy, on sound commercial principles".

The exploitable energy resources in our country are unevenly distributed, like Coal resources are

abundant in Bihar/Jharkhand, Orissa, West Bengal and Hydro Resources are mainly concentrated



in Northern and North-Eastern Regions. As a result, some regions do not have adequate natural

resources for setting power plants to meet their future requirements whereas others have

abundant natural resources. Demand for power continues to grow unabated. This calls for

optimal utilization of generating resources for sustainable development. Thus, formation of

National Power Grid is an effective tool to achieve this as various countries have adopted the

model of interconnecting power grid not only at national level but also at international level.

Further, acquiring Right of Way (ROW) for constructing transmission lines is getting

increasingly difficult, especially in eco-sensitive areas like North-Eastern Region, Chicken neck

area, hilly areas in Jammu & Kashmir and Himachal Pradesh. At the same time, these areas are

also endowed with major hydro potential of the country. This necessitates creation of

“Transmission Super Highways”, so that in future, constraints in ROW do not cause bottleneck

in harnessing generating resources. Inter-connection of these highways from different part of the

country would ultimately lead to formation of a high capacity “National Power Grid”.

Thus, developments in power sector emphasize the need for accelerated implementation of

National Power Grid on priority to enable scheduled/unscheduled exchange of power as well as

for providing open access to encourage competition in power market. Formation of such a

National Power Grid has been envisaged in a phased manner.

Initially, considering wide variations in electrical parameters in the regional grids, primarily

HVDC interconnections were established between the regions. This was completed in the year

2002, thereby achieving inter-regional power transfer capacity of 5000 MW.

In the next phase, inter-regional connectivity is planned to be strengthened with hybrid system

consisting of high capacity EHV/UHV AC and HVDC links. Such a National Power Grid is

envisaged to disperse power not only from Mega sized generation projects but also to enable

transfer of bulk power from one part of the country to another in different operational scenarios

say, in varying climatic conditions across the country: Summer, Winter, Monsoon etc.

Commissioning of links under this phase has already begun with the commissioning of 2000

MW Talcher-II HVDC Bipole, Raipur – Rourkela 400kV D/C AC transmission line having



Series Compensation, augmentation of Gazuwaka HVDC (500MW) back to back link and Tala

transmission system. The inter-regional transfer capacity of 16,200 MW is available as on date.

Further strengthening of National Power Grid is envisaged through high capacity AC EHV lines,

765 kV UHV AC lines/ HVDC lines. This phase is planned to be implemented by 2012 when

inter-regional power transfer capacity will be enhanced to about 37,700 MW by the end of XI

Plan, depending upon planned growth of generation capacity.



1.8 SEGMENTS IN POWER GENERATION

THERMAL

Current installed capacity of Thermal Power (as of 12/2008) is 93392.64 MW which is 63.3% of

total installed capacity.

Current installed base of coal based thermal power is 77458.88MW which comes to 53.3% of

total installed base.

Current installed base of gas based thermal power is 14734.01MW which is 10.5% of total

installed base.

Current installed base of oil based thermal power is 1199.75 which is .09% of total installed

base.

Maharashtra is the largest producer of thermal power in the country.

Fig1.4: Comparison of Energy Intensity



HYDRO POWER

India is blessed with a rich hydro power potential. In the exploitable potential terms, India ranks

fifth in the world. Less than 25% of the potential has been developed as of now. A large hydro

has four main advantages.

It is a source of green energy.

It has low variable cost.

It is grid friendly.

It can also can sub serve other purposes by irrigation, flood control, etc.

India has 3 major rivers: the Indus, the Brahmaputra, and the Ganga. It also has three major river

systems? Central Indian, west flowing rivers of south India, and east flowing rivers of south

India with a total of 48 river basins. The total potential from these river basins is 600TWh

(Terawatt Hours) of electricity.

Hydroelectric projects can be classified on the basis of purpose, hydraulic features, capacity,

head, constructional features, mode of operation, etc. The main types are:

ROR (Run of River) There are not large reservoirs; a part of water flow is diverted to

the plant which is adjacent to the river. After generation the flow is diverted back to the

main flow through the tail race. This type of hydro plants requires a diversion dam and

has unregulated water flow.

Dam Storage In these types of hydro plants, large reservoirs are created by the

construction a sizeable dam across the river and the plants is situated at the toe of the

dam. Here, water could be regulated to generate electricity depending upon the demand

Pumped Storage These types of plants have two reservoirs, one at the upstream of the

power plant and one at the downstream. When there is low peak demand, the water from

the reservoir situated downstream is pumped back to the upstream reservoir.

As of today, the total identified hydro potential is 1 48 701 MW (mega watt). According to the

list of hydro electric projects in the country, a total of 29 572 MW, 19.9% of the total has been



harnessed and 13 286 MW is under construction. A total of 3 660 MW of pumped storage

schemes have also been developed.

Various initiatives for accelerated development have been taken up by the central government to

harness the hydro potential in India. Some of these are

Hydro Power Policy (1998)

50 000 MW initiative

Preparation of viable models for private sector participation

Ranking of projects

R&M up gradation and life extension programmes

Facilitation for trading and co-operation with other countries

Execution of projects with interstate aspects by Central Public Sector Units

Fig1.5: State wise Hydro-Power Generation



NUCLEAR POWER GENERATION

In India, out of total installed capacity of 126993.97 MW (as on 31 August 2006); the share of

nuclear power is 3% at 3900 MW. From the electricity generation point of view, nuclear power

plants contributed 17 238.89 GWh out of total electricity generation of 6 17 510.44 GWh during

April 2005 - March 2006, amounting to 2.79% of total generation. However, with exponential

growth in energy demand coupled with a finite availability of coal, oil, and gas; there is a

renewed emphasis on nuclear energy. Moreover, nuclear energy is considered to be an

environmentally benign source of energy.

Department of Atomic Energy is carrying out nuclear energy programme in India. The Indian

Nuclear Power Programme has the following three stages:

The first stage, already commercial now, comprised setting up of PHWRs (pressurised

heavy water reactors) and associated fuel cycle facilities. PHWRs use natural uranium as

fuel and heavy water as moderator and coolant. The design, construction, and operation

of these reactors is undertaken by public sector undertaking the NPCIL (Nuclear Power

Corporation of India Ltd). The company operates 16 reactors (2 Boiling Water Reactors

and 14 PHWRs) with a total capacity of 3900 MWe.

In the second stage, it was envisaged to set up FBRs (fast breeder reactors) along with

reprocessing plants and plutonium-based fuel fabrication plants. Plutonium is produced

by irradiation of Uranium-238. The Fast Breeder Programme is in the technology

demonstration stage. Under this stage, the IGCAR (Indira Gandhi Centre for Atomic

Research) has completed design of a 500 MWe PFBR (prototype fast breeder reactor)

being implemented by BHAVINI (Bharatiya Nabhikiya Vidyut Nigam).

The third stage of the Indian Nuclear Power Programme is based on the thorium-

uranium-233 cycle. Uranium-233 is obtained by irradiation of thorium. Presently this

stage is in technology development phase. The ongoing development of 300 MWe

AHWR (advanced heavy water reactor) at BARC (Bhabha Atomic Research Centre)

concerns thorium utilization and its demonstration.



SOLAR

India is endowed with rich solar energy resource. The average intensity of solar radiation

received on India is 200 MW/km square (megawatt per kilometer square). With a geographical

area of 3.287 million km square, this amounts to 657.4 million MW. However, 87.5% of the land

is used for agriculture, forests, fallow lands, etc., 6.7% for housing, industry, etc., and 5.8% is

either barren, snow bound, or generally inhabitable. Thus, only 12.5% of the land area

amounting to 0.413 million km square can, in theory, be used for solar energy installations. Even

if 10% of this area can be used, the available solar energy would be 8 million MW, which is

equivalent to 5 909 mtoe (million tons of oil equivalent) per year.

However, solar energy is a dilute source. The energy collected by 1 m square of a solar collector

in a day is approximately equal to that released by burning 1 kg of coal or 1/2 litre of kerosene.

Thus, large areas are needed for collection. Besides, the efficiency of conversion of solar energy

to useful energy is low. Therefore, the energy actually available would be order of magnitude

lower than the aforementioned estimates. Nonetheless, it is obvious that solar energy can be a

good source of meeting energy demands.

On the applications side, the range of solar energy is very large. While at the high end there are

megawatt level solar thermal power plants, at the lower end there are domestic appliances such

as solar cooker, solar water heater, and PV lanterns. Then, in between, there are applications

such as industrial process heat, desalination, refrigeration and air-conditioning, drying, large

scale cooking, water pumping, domestic power systems, and passive solar architecture. Solar

energy can be harnessed to supply thermal as well as electrical energy. Those technologies that

use solar energy resource to generate energy are known as solar energy technologies.

Solar energy technologies consists of

Solar thermal technologies, which utilize sun's thermal energy and

Solar photovoltaic technology, which convert solar energy directly in to electricity.



Solar energy resource: Since the accurate information about solar energy resource at a specific

location is crucial for designing appropriate solar system. Solar energy resource assessment

becomes an essential activity of any solar energy programme.

WIND

The sun‘s energy falling on the earth produces large-scale motions of the atmosphere causing

winds, which are also influenced by small scale flows caused by local conditions such as nature

of terrain, buildings, water bodies, etc. Wind energy is extracted by turbines to convert the

energy into electricity. A small-scale and large-scale wind industry exists globally. The small-

scale wind industry caters for urban settings where a wind farm is not feasible and also where

there is a need for household electricity generation. The large-scale industry is directed towards

contributing to countrywide energy supply.

Wind resource in India

The wind resource assessment in India estimates the total wind potential to be around 45 000

MW (mega watt). This potential is distributed mainly in the states of Tamil Nadu, Andhra

Pradesh, Karnataka, Gujarat, Maharashtra, and Rajasthan. The technical potential that is based

on the availability of infrastructure, for example the availability of grid, is estimated to be around

13 000 MW. In India, the wind resources fall in the low wind regime, the wind power density

being in the range of 250 -450 W/m2. It may be noted that this potential estimation is based on

certain assumptions. With ongoing resource assessment efforts, extension of grid, improvement

in the wind turbine technology, and sophisticated techniques for the wind farm designing, the

gross as well as the technical potential would increase in the future.

Status

Wind power has become one of the prominent power generation technologies amongst the

renewable energy technologies.



Technology Trends

Use of wind energy started long ago when it was used for grinding. The commercial use of wind

energy for electrical power generation started in 1970s. Horizontal axis wind turbines are most

commonly used for power generation, although some vertical axis wind turbine designs has been

developed and tested. The vertical axis turbines have structural as well as aerodynamic

limitations and, hence, are not commercially used.

Wind power in India

Wind turbines offered in India range from 250 kW to 2 MW capacities. As of 31 March 2006,

the total installed capacity in the country was 5340 MW, which is 46% of the total capacity of

renewable resources based power generation. There are 7 manufacturers of wind turbine

generators in India.

Small Hydro

The word hydro comes from a Greek word meaning water. The energy from water has been

harnessed to produce electricity since long. It is the first renewable energy source to be tapped

essentially to produce electricity.

Hydro power currently suffices one fifth of the global electricity supply, also improving the

electrical system reliability and stability throughout the world. It also substantially avoids the

green house gas emissions, thus complimenting the measures taken towards the climate change

issues.

Hydro projects below a specified capacity are known as small hydro. The definition of small

hydro differs from country to country, depending on the resources available and the prevalent

national perspective. The small hydro atlas shows that the largest of the projects (30 MW) is in

US and Canada. Small hydro power has emerged as one of the least cost options of harnessing

green energy amongst all the renewable energy technologies.

According to the power generated, small hydro power is classified into small, mini/micro

and Mico hydro.



In India, it is being classified as follows:

Small hydro - 2 MW - 30 MW

Mini - 100 kW - 2 MW

Micro - 10 kW - 100 kW

Mico hydro - 1 kW - 10 kW



1.9 REFORMS IN POWER SECTOR

1.9.1 PRE REFORM STAGE

Confronted with unprecedented economic crisis in 1991, Government of India embarked upon a

massive cleanup exercise encompassing all policies having financial involvement of

Governments- both at the level of Union and States.

Since after Electricity (supply) Act 1948, the power sector was mainly under the government

control which owned 95 % of distribution and around 98% of generation through states' and

central government utilities, the power sector was chiefly funded by support from government

budgets in the form of long term, concessional interest loans. These utilities were made to carry

forward the political agenda of the ruling parties of the day and the cross- subsidization i.e.

charging industrial and commercial consumers above the cost of supply and to charge

agricultural and domestic consumers below cost of supply was an integral part of the functioning

of the utilities.

YEAR MAJOR DEVELOPMENTS1991 The Electricity Laws (Amendment) Act, 1991--Notification. Amends the Indian

Electricity Act, 1910 and the Electricity (Supply) Act, 1948 by Private Sector allowed to establish generation projects of all types (except nuclear) 100% foreign investment & ownership allowed New pricing structure for sales to SEBs. 5 Year Tax holiday; import duties slashed on power projects

1992 Intensive wooing of foreign investors in US, Europe & Japan

1992-97 8 projects given "fast-track" status. Sovereign guarantees from Central Government. Seven reached financial closure Dabhol (Enron), Bhadravati (Ispat), Jegurupadu (GVK), Vishakapatnam

(Hinduja), Ib Valley (AES), Neyveli (CMS),Mangalore (Cogentrix)

1995-96 World Bank Reform Model - First Test Case Orissa Electricity Reform Act passed Establishment of Orissa Electricity Regulatory Commission SEB unbundled into Orissa Power Generating Company (OPGC), Orissa Hydel

Power Corporation (OHPC) and Grid Corporation of Orissa (GRIDCO) Distribution privatized



1996 Chief Ministers Conference: Common Minimum Action Plan for Power: Recommend policy to create CERC and SERCs

Licensing, planning and other related functions to be delegated to SERCs. Appeals against orders of SERCs to be in respective High Courts SERC to determine retail tariffs, including wheeling charges etc., which will

ensure a minimum overall 3% rate of return. Cross -subsidization between categories of consumers may be allowed by SERCs,

but no sector to pay less than 50% of the average cost of supply (cost of generation plus transmission and distribution). Tariffs for agricultural sector not to be less than Rs.0.50 Kwh and to be brought to 50% of the average costing not more than three years.

Recommendations of SERCs to be mandatory, but financial implications any deviations made by State/UT Government, to be provide for the explicitly in the State budget.

Fuel Adjustment Charges (FCA) to be automatically incorporated in the tariff. Package of incentives and disincentives to encourage and facilitate the

implementation of tariff rationalization by the States. States to allow maximum possible autonomy to the SEBs, which are to be

restructured and corporatized and run on commercial basis. SEBs to professionalize their technical inventory manpower and project management practices.

1997 CEA Clearance exempted for projects under 1000MW but State Government environment clearance required up to 250-500 MW

Liquid fuel policy -- naphtha allocations to IPPs

1998 Mega-Power Policy: special incentives for the construction and operation of hydro-electric power plants of at least 500 MW and thermal plants of at least 1,000 MW.

The Electricity Laws (Amendment) Act, 1998 and Electricity Regulatory Commissions Ordinance -- Notification.

Creation of Central Transmission Utility STUs to be set up with government companies Establishment of CERC and SERCs Rationalization of electricity tariffs, Policies regarding subsidies Promotion of efficient and environmentally benign policies Power Grid notified as Central Transmission Utility Haryana Electricity Reforms Act: HSEB unbundled into Haryana Vidyut Prasaran Nigam Ltd., a Trans Co.

(HVPNL) and Haryana Power Corporation Ltd. Creation of HERC Two Governments owned distribution companies viz. Uttar Haryana Bijli Vitaran

Nigam Ltd. (UHBVNL) and Dakshin Haryana Bijli Vitaran Nigam (DHBVNL) have been established.

DFID's technical co-operation grant of 15 million pounds available for reforms.



1999 Andhra Pradesh Electricity Reforms Act APSEB unbundled into Andhra Pradesh Generation Company Ltd. (APGENCO) and Andhra Pradesh

Transmission Company Ltd. (APTRANSCO for transmission & distribution) Creation of APERC

Other Developments: World Bank loan of US $ 210 million under the APL DFID's 28 million pounds as technical co-operation grant. CIDA technical assistance of Canadian $ 4 million.

- Karnataka Electricity Reforms Act KEB and KPCL transformed into new companies: Karnataka Power Transmission

Corporation Ltd. (KPTCL) and Visvesvaraya Vidyut Nigama Ltd., a GENCO, (VVNL)

Creation of KERC Other Developments:

KPTCL has carved out five Regional Business Centers (RBCs) for five identified zones.

2000 Power Ministers' Conference and Electricity Bill 2000 (draft): Functional disaggregation of generation, transmission and distribution with a view

to creating independent profit centres and accountability; Re organization and restructuring of the State Electricity Boards in accordance

with the model, phasing and sequencing to be determined by the respective State Governments

States to determine the extent, nature and pace of privatization. (public sector entities may continue if the States find them sustainable);

Transmission to be separated as an independent function for creation of transmission highways that would enable viable public and private investments;

Amendments to the Indian Electricity Act, 1910 made in 1998 for facilitating private investment in transmission have been broadly retained except that the private transmission companies would be regulated by the Regulatory Commissions and Transmission Centers inst under the direction, supervision and control of the Central/State Transmission Utilities;

Present entitlements of States to cheaper power from existing generating stations to remain undisturbed;

Provision of compulsory metering for enhancing accountability and viability; Central and State Electricity Regulatory Commissions to continue broadly on the

lines of the Electricity Regulatory Commissions Act, 1998; State Regulatory Commissions enjoined to recognize in their functioning the need

for equitable supply of electricity to rural areas and to weaker sections; Stringent provisions to minimize theft and misuse.

Source: www.cea.nic.in/power_sec_reports/

Table 1.1: major developments in power sector

1.9.2 ELECTRICITY ACT 2003



An Act to consolidate the laws relating to generation, transmission, distribution, trading and use

of electricity and generally for taking measures conducive to development of electricity industry,

promoting competition therein, protecting interest of consumers and supply of electricity to all

areas, rationalization of electricity tariff, ensuring transparent policies regarding subsidies,

promotion of efficient and environmentally benign policies constitution of Central Electricity

Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters

connected therewith or incidental thereto.

GENERATION:

Any Company, association or body of individuals (even unincorporated) can generate

electricity without requirement of techno-economic clearance of CEA, or approval of

State Government or regulator, except in case of hydropower station for which written

consent of Central Electricity Authority is required.

A Generating Company can supply electricity directly to more than one consumer and is

vested with the duty to establish, operate and maintain sub-stations, tie lines etc.

Any entity, (company, co-operative society or association of persons) can establish a

Captive Generation Plant (CGP) primarily for its own use without any entry barriers.

Open access is to be provided to all CGPs. No cross-subsidy surcharge would be levied

on the persons who have established CGP for carrying electricity to destination of his

own use.

RURAL ELCTRIFICATION/GENERATION/DISTRIBUTION:

Government of India will have to formulate a National Policy after consulting State

Governments & CEA, to govern (i) rural electrification and local distribution through

local bodies, and (ii) rural off-grid supply including those based on

renewable/nonconventional energy resources.

No license is required for generating or distributing in rural areas notified by the State

Govt.



LICENSING

Trading has been recognized as a separate licensed activity along with transmission and

distribution. However, a license is not required in respect of (i) trading by a distribution

licensee, (ii) transmission, distribution or trading by any Govt., as the Govt. would be

deemed a licensee.

Electricity Regulatory Commission (ERC), on the recommendation of Government, in

accordance with the national electricity policy and public interest can exempt any of the

local bodies6 from requiring license.

TRADING AND CAPTIVE GENERATION

Trading, i.e., purchase of electricity for resale, is a separate licensed activity, except for

distribution licensees who do not require a separate trading license. Traders can enter into

direct contracts with the consumers and determine its terms and conditions (including

tariff).

The Appropriate Commission may specify

The entry barriers for traders – technical requirements, capital adequacy requirement,

and credit-worthiness;

Duties re. supply and trading in electricity to be discharged by a trader; and

Fix trading margin in intra-state trading if considered necessary.

ERCs have to develop trading market and have to be guided by National Tariff Policy.

OPEN ACCESS

Open access means non-discriminatory use of transmission lines, distribution system and

associated facilities by any licensee/consumer/Genco in accordance with ERC

regulations.



The licensees, consumers and Gencos have to pay transmission/wheeling charges for

open access. Consumers has to also pay a surcharge (to be utilized to meet cross subsidy)

determined by ERC, for open access.

ERC may order any licensee owning intervening transmission facilities to provide use of

facilities to any other licensee, to the extent of surplus capacity.

A State Transmission Utility is obliged to provide non-discriminatory open access to its

transmission system for use by a licensee or Genco forthwith, or by any consumer once

distribution level open access has been provided.

There is no statutory time limit for introduction of open access. ERC has to determine by

June 10, 2004 the phases and conditions, subject to which open access would be

introduced.

DISTRIBUTION

The distribution licensee has a mandatory duty to supply on request of consumer in a

time bound manner if the consumer agrees to pay the applicable tariff. ERC is

empowered to suspend or revoke license of a Discom for failure to maintain

Uninterrupted supply. Distribution licensee is empowered to recover

charges/expenses/security and disconnect supply for non-payment of dues.

Discoms can enter into direct contracts with consumers.

Discoms can engage in other businesses but have to share revenue to reduce wheeling

charges, and maintains separate accounts for the same.

ERCs may grant more than one distribution licenses can be issued in a given area,

permitting them to supply electricity through their own distribution system. To get a

subsequent distribution license any person will have to comply with additional

requirements prescribed by GoI regarding capital adequacy, creditworthiness, or Code of

Conduct etc.. If an applicant meets such requirements, he shall not be denied grant of the

license.

ERCs may permit by regulations a consumer/class to receive supply of electricity from

anyone other than the distribution licensee of the area of supply – against payment of

wheeling charge & surcharge in lieu of cross subsidy.



Distribution licensee is free to undertake distribution for a specified area within his area

of supply without need for a separate license. Provided that the distribution licensee shall

remain liable for the supply.

TRANSMISSION

To secure non-discriminatory open access, transmission has been segregated as a wires

function without any trading (buying and selling). Central transmission utility (CTU) and

all State transmission utilities (STUs) are deemed licensee.

CTU and STUs functions are (i) Transmission; (ii) planning & co-ordination of

transmission system; (iii) development of efficient and economical transmission lines

from generating stations to load centers; (iv) providing non-discriminatory open access to

the system.

RLDCs and SLDCs are empowered to issue directions, and exercise supervision &

control to ensure stability, efficiency & economy of grid operation in the region and the

State respectively. Licensees, generating companies and other persons connected with

operation of power system shall comply. SLDC shall ensure compliance with RLDC

directions.

Pending creation of separate RLDCs & SLDCs, the CTU and the STU shall perform the

role.

TARIFF

Government has been distanced from determination of tariff. This power has been vested

in the CERC/SERC. In determination of tariff CERC/SERC shall be guided by factors

including National Electricity Policy, tariff policy (formulated by Central Government),

CERC‘s principles and methodologies for setting tariff and principles rewarding

efficiency and multiyear tariff.

In case tariff is determined through transparent bidding as per Government of India

guidelines, the same shall be adopted by the ERCs.



To promote competition among distribution licensees, where there are 2 or more

distribution licensees supplying in an area, the ERC may fix only maximum ceiling of

tariff for retail sale.

The PPAs/BSAs entered into before 10th June, 2003 have not been explicitly saved or

granted a protection from regulatory intervention.

REGULATORY COMMISSIONS

It is mandatory to establish SERCs within 6 months from 10th June, 2003. Joint

Commission can be constituted for two or more States or Union territories or both by

mutual agreement.

The new functions to be performed by CERC/ SERC include specifying Grid Code,

Supply Code (only SERC), levy fees, fix trading margins in interstate trading.

In exercise of their functions, ERCs shall be guided by – National Electricity Policy,

National Electricity Plan & Tariff Policy; directions of GoI/State Government concerned,

in matters of policy involving public interest – where such Government‘s decision shall

be final as to whether the directions relates to a policy involving public interest. There is

no express provision enabling ERCs to depart from such directions.

Provision for separate ERC funds (not consolidated funds) for finance of ERC

expenditures.

POLICY ISSUES

Central Government shall prepare, publish and revise National Electricity Policy and

Tariff policy in consultation with State Governments and CEA9.

The implementation of the Act is largely dependent on the nature and scope of the

diverse policy instruments to be issued by Government, and institutions like Special

Courts, Appellate Electricity Tribunal, NLDC, RLDC, SLDC, SERCs and SEB

successors to be constituted by Government‘s. It is noteworthy that these instruments will

have a bearing are:-

Role and functioning of ERCs,



Role and functioning of CEA,

Market development,

Governance of the sector – regulation, grid operations, safety issues, and

Enforcement.

CONSUMER INTERESTS

Creation of a Consumer redressal forum (CRF) by Distribution licensee in a time bound

manner. The consumers aggrieved from CRF can approach to an ‘ombudsman’10.

Distribution licensee has to supply electricity within 1 month from the date of request for

supply, except where capital works are required for connectivity. Failure of distribution

licensee to supply within said time period would attract penalty.

ENFORCEMENTS

Suitable provisions for provisional assessments and recovery of compensatory fines may

be able to address a long-standing vacuum in law.

Special Courts are to be established by Government‘s for speedy disposal of cases

relating to theft of electricity.

The scope of offences has been expanded and enhanced punishments have been

prescribed for subsequent or continuing offences.

Stronger powers (accompanied with better safeguards) have been provided for

conducting inspections/search/seizure.

DISPUTE RESOLUTION

The appeal against all orders of ERC/adjudication officer would lie to an expert

Appellate Tribunal (an expert body), which shall dispose appeals within prescribed time.

Appeal from appellate tribunal lies to Supreme Court. The appeal to Supreme Court is

limited to substantial question of law.



1.9.3 ELECTRICITY (Amendment) ACT, 2007:

The Electricity (Amendment) Act, 2007, amending certain provisions of the Electricity Act,

2003, has been enacted on 29th May, 2007 and brought into force w.e.f. 15.06.2007. The main

features of the amendment Act are: -

Central Government, jointly with State Governments, to endeavor to provide access to

electricity to all areas including villages and hamlets through rural electricity

infrastructure and electrification of households.

No License required for sale from captive units.

Deletions of the provisions for elimination of cross subsidies. The provisions for

reduction of cross subsidies would continue.

Definition of theft expanded to cover use of tampered meters and use for unauthorized

purpose. Theft made explicitly cognizable and non-bail able.

1.9.4 DEMAND SIDE MANAGEMENT:

Demand-side management is used to describe the actions of a utility, beyond the customer's

meter, with the objective of altering the end-use of electricity - whether it is to increase demand,

decrease it, shift it between high and low peak periods, or manage it when there are intermittent

load demands - in the overall interests of reducing utility costs. In other words DSM is the

implementation of those measures that help the customers to use electricity more efficiency and

it doing so reduce the customers to use the utility costs. DSM can be achieved through.

Improving the efficiency of various end-users through better housekeeping correcting

energy leakages, system conversion losses, etc ;

Developing and promoting energy efficient technologies, and

Demand management through adopting soft options like higher prices during peak hours,

concessional rates during off-peak hour’s seasonal tariffs, interruptible tariffs, etc.

DSM, in a wider definition, also includes options such as renewable energy systems, combined

heat and power systems, independent power purchase, etc, that utility to meet the customer's

demand at the lowest possible cost. Often the terms energy efficiency and DSM are used



interchangeably. However, it is important to point out that DSM explicitly refers to all those

activities that involve deliberate intervention by the utility in the marketplace so as to alter the

consumer's load profile. Energy efficiency issued in an all encompassing sense and includes any

activity that would directly or indirectly lead to an increase in energy efficiency. To make this

distinction precise, a program that encourages customers to install energy efficient lighting

systems through a rebate program would fall under DSM. On the other hand, customer purchases

of energy efficient lighting as a reaction to the perceived need for conservation is not DSM but

energy efficiency gains.

There has been growing recognition of the importance of energy efficiency in India's electricity

sectors. The Ministry of Power (MoP) is the nodal agency for energy conservation in the

country. The Bureau of Energy Efficiency (BEE), an autonomous body under the MoP, was set

up in 1989 to coordinate initiatives and activities on energy conservation. Several state electricity

boards (SEBs) have also set up Energy Conservation Cells, some of which have been assisting

industries in conducting energy audits. Several reports have been attempted to estimate the

potential for energy conservation in various consuming sectors and have also identified various

Energy Efficiency technologies (EETs) for important end-uses. The National Energy Efficiency

Program (NEEP) of the Government of India (GOI) has targeted savings of about 5000 MW to

be realized by the end of the Eighth plan through both demand (2750 MW) and supply side

(2250MW) efficiency improvements. In terms of Government policies, there is special

equipment in the first year, subsidies for energy audits, reduced customs duty for selected control

equipment for managing energy use, and so on.

1.9.5 Environmental Reform in the Electricity Sector:

Enhanced economic activity and population growth have led to increasing energy demand that in

turn has spurred electricity generation. But large-scale electricity generation and distribution

have adverse environmental impacts, varying by the technologies employed and their locations.

These need to be addressed so that energy services can be enhanced in harmony with the

environment, within our ecological footprints. Due to the “externalities” of electricity

generation, that is, the negative impacts not directly affecting or being restricted to those



involved, the costs of impact mitigation are typically not included in electricity prices.

Consideration for the environment has therefore to be forced into the reckoning, or preferably

integrated into the system, hence the importance of environment policy in the context of the

power sector.

Focusing on environmental issues and policies applicable to the power sector in China and India,

these countries generate 68% of the electricity generated in developing Asia, but with a total

population of about 2.4 billion, have large unmet needs.

In approaching the problem of environmental protection in the power sector in rapidly

developing country, our analytical framework consists of identification of those state

environmental policies and regulations that pertain to the power sector, both directly and

indirectly, assessment of the barriers encountered, and finally recommendations of likely

solutions to circumvent these problems.

Let us consider the impacts of electricity generation on the environment. The focus is on to list

the national environmental policies that affect these impacts, beginning with general direction,

proceeding to specific rules and standards and then to alternatives to conventional electricity

generation. This leads to the problems that beset effective policy implementation.



1.9.6 POWER SECTOR IMPACTS ON THE ENVIRONMENT

The need for electricity – for productive purposes and for extending home electrification – far

outstrips supply in India. In 2004, Indian utilities generated 587 TWh from 118.4 GW, with a

shortage of about 43 TWh (CEA-GoI, 2005). Hence, while demand side management (DSM) and

efficiency improvement can reduce the demand-supply gap, increased generation – through more

power plants and/or increased utilization of existing capacity – is essential.

Electricity generation has several impacts on the environment, depending on the choice of

technologies. While the evaluation of specific power plants would necessitate the assessment of

site and plant-specific issues, in general, one can consider source-specific local, regional, and

global impacts.

LOCAL IMPACTS

Large power sources can affect their surroundings through impacts such as air pollution,

submergence of land and waste accumulation, excessive resource use and disruption of human

activity.

The impacts of coal-based thermal plants are particularly important in a study of India, as these

plants currently provide the largest generating capacity in India, and about 80% of the actual

generation. Electricity generation consumed 67% of India‘s coal use, in 2002; further, India‘s

coal consumption is projected to grow 2.2% annually between 2002 and 2025 (EIA, 2005).

Most of the existing thermal power plants in India use the traditional pulverized coal combustion

technology. As a result, they have to contend with gaseous emissions including carbon dioxide,

nitrogen oxides, carbon monoxide, sulphur dioxide, mercury and particulate matter. Coal-

burning thermal power plants in India are responsible for about 40% of the country‘s SO2 and

41% of its CO2 in 2000 (Shukla, Nag, & Biswas, 2003). Coal-plant emissions far outweigh those



from other fossil-fuel plants contributing to acid rain, and air pollution and the consequent

adverse effects on health.

When based on locally mined coal, the associated problems of mining accidents and land

degradation are serious. In some areas, the use of high ash coal results in disposal problems,

although ash does have productive uses such as brick-making. However, with the alternative

fossil-fuel options, oil- and gas-based plants, too, issues of waste disposal and possible drilling

and pipeline accidents have to be considered. The water use by some thermal plants constitutes a

more serious problem; Indian thermal power plants reportedly use 88% of the country‘s

industrial water supply (DTE, 2003). Temperature increases and pollution of receiving water

bodies through inadequately treated effluents have also to be dealt with.

Although based on a clean and renewable source, large hydroelectric plants are not impact-free.

Large dams can cause submergence of human settlements and natural forests, adversely affecting

or even destroying people‘s livelihoods, particularly traditional lifestyles, and also terrestrial

ecosystems. However, the magnitude of these impacts varies with the location and the height of

the dams constructed.

With nuclear power plants, radiation hazards (not only through accidents), and disposal of

radioactive spent fuel must also be contended with. Thus far, no country is sure of safe and

permanent waste disposal. And, while clean in terms of carbon-emissions, both ends of the

nuclear fuel cycle – uranium mining and nuclear waste – have harmful environmental impacts, if

not very carefully managed.

However, environmental impact costs are not easily quantifiable. Pollution-induced health

impacts are underestimated when economically disadvantaged people do not obtain medical

treatment; similarly, disruption costs of displaced communities could be inestimable.

REGIONAL IMPACTS

Regional pollution issues, for example the issue of acid rain and sulphur deposition, have

received attention in Northeast Asia. While the magnitude of coal-fired power plants'



contribution may be disputed, particularly during winter and spring, when dominant high-

pressure systems sweep accumulated pollutants off the landmass toward the eastern ocean-mass.

GLOBAL IMPACTS

The Indian power sectors contribute about 52% of the carbon emissions in the country. Due to

the magnitude of its electricity generation, China‘s total carbon emissions are over three times

those from India and even on a per capita basis are over 2½ times. However, as emissions per

capita are low by international standards (EIA, 2003), and developing countries are not required

to adopt greenhouse gas (GHG) reduction targets under the Kyoto protocol (in effect from

February 16, 2005), global issues currently remain less important than local impacts.

NATIONAL ENVIRONMENTAL LEGISLATION AFFECTING THE ELECTRICITY

SECTOR

1. Energy Conservation Act, 2001 (with effect from 2002):

National Environment Appellate Authority Act, 1997

National Environment Tribunal Act, 1995

Ministry of Environment and Forests Environmental Impact Assessment Notification,

1994 (and additional notification of September 2005)

Central Pollution Control Board‘s National Ambient Air Quality Standards

Notification, 1994

Environment (Protection) Act, 1986, amended 1991 (followed by Rules and

amendments of 1986, 1998, 1999, 2001, 2002, 2003, 2004)

The Air (Prevention and Control of Pollution) Act, 1981, and Amendment, 1987

The Water (Prevention and Control of Pollution) Act, 1974, amended 1988

42nd Amendment, 1976, to the Indian Constitution (1949)

a. Article.48A (directing the State to make efforts for the protection and improvement of the

environment)

b. Article 51A (g) (stating that every citizen has a fundamental duty towards protecting the

environment)



2. The Atomic Energy Act, 1962 and Radiation Protection Rules, 1971.

NATIONAL ENVIRONMENTAL POLICIES RELEVANT TO THE ELECTRICITY

SECTOR

National Electricity Policy, 2005

National Environmental Policy, 2004

Environmental Action Plan, 1993 (including cleaner technologies & development of

alternative energy projects)

The National Conservation Strategy and Policy of Environment and Development, 1992

The Policy Statement for Abatement of Pollution,1992 (including pollution prevention at

source, adoption of ―polluter pays principle‖, & encouragement of best practices)

National Water Policy, 1987 (with first priority for drinking water, followed by irrigation,

hydro power, navigation, industrial and other uses)



1.10 Market Structure of the Industry:

There are more than 75 players in this industry.

Out of which 80% of this sector’s market share is covered by 20 players in the industry.

NTPC has the largest share in this sector of 35%.

A P Pow.Gen.Corp5%

BSES Yamuna Pow2%

CESC2%

GMR Power Corpn.

1%Haryana Power

5%JSW Energy

2%Neyveli Lignite

3%NHPC Ltd

3%

NTPC35%

Nuclear Power Co

3%

Power Grid Corpn

5%

Reliance Infra.7%

Southern Power

4%

Tata Power Co.5%

Torrent Power

4%

West Bengal Pow.2%

others12%

Market Share

Fig 1.6: Market share of power sector



2.1 COMPANY PROFILE:

The GMR group is a prominent contributor to the Indian Power sector through various projects

across various fuel types (hydro, thermal and natural gas). The company capitalized on the

private investment policy of the government in constructing, developing and managing power

plants. The group has established three operational power plants. The group has established three

operational power plants and is currently developing eight power projects.

The subsidiaries under GMR Energy Limited:

235 MW – Mangalore Power Plant:

The company has planned to relocate the naphtha based combined cycle Barge Mounted Power

Plant (BMPP) from Mangalore to Kakinada Coast in the state of Andhra Pradesh and convert the

plant to gas based considering the availability of gas at Godavari basin. Accordingly 55.81 acres

of land has been taken on lease from government of Andhra Pradesh at Kakinada part for

establishing the BMPP. It is expected that the relocation and conversion of the Mangalore power

plant to be completed during March 2010.

In the mean time the plant is operating on merchant basis and is supplying power to BESCOM

and to other buyers through trading company.

200MW – Chennai Power Plant:

The plant is Low Sulphur Heavy Stock Liquid Fuel (LSHS) powered facility and is owned by

GPCPL, 51% subsidiary company. The plant sells all of its power output to TNEB pursuant to a

15 year power purchase agreement expiring in Feb 2014. The plant has clocked an 82% PLF

during the current fiscal year.

The company has taken even the operation and maintenance of the plant with effect from April

1, 2009. Previously the plant was operated and maintained by Hyundai Heavy Industries

Company Limited.



370MW – Vemagiri Power Plant:

The Vemagiri Power Plant is a natural gas fired combined cycle power plant with a gross

capacity of 387.625 MW and a contracted capacity of 370 MW located near Rajahmundry in the

east Godavari district of Andhra Pradesh.

During the year the plant was kept in preservation mode for major period due to non availability

of gas. As directed by APPCC, the plant resumed operations from December 2008 with diverted

gas till April 2009.in the mean time Reliance Industries Ltd started supply of natural gas to the

plant from its KG D6 field. With these developments the plant is expected to operate at full

capacity in the coming years.

1050 MW – Kamalanga Power Project:

The company has begun the process of setting up of 1050 MW coal field power plant at

Kamalanga Village, Dhenkanal District of the state of Orissa. The company has agreed to sell up

to 25% of the power generated from the project to the Grid Corporation of the state of Orissa

(GRIDCO) and the remaining power through PTC India Ltd.

Long term coal linkage for entire 1050 MW is received from Mahanadi coal fields and the

company has been jointly allocated with other developers, Rampia and Dip side of Rampia coal

block in the state of Orissa with a proportionate share of coal reserve if 112MT. engineering

Procurement and Construction (EPC) control was signed with standing electric power

construction corporation, Jinan, China. The company has tied up the entire debt requirement of

Rs 3405 Crore and achieved financial close on May 27, 2009 and has obtained all major

clearances and in principal approval for Mega Power status. The plant is expected to achieve

commercial operation in 2012.

1200MW Chhattisgarh Power Project;

The company has signed an MOU and then a pre – implementation agreement with government

of Chhattisgarh State Electricity Board for setting up of 1200 MW coal fired power project in

Chhattisgarh.



The company is required to provide to the state at the energy changes determined by the

appropriate electricity regulatory commission or 7.5% of the net power generated, if the

company is allotted captive coal block in the state of Chhattisgarh to fuel the project.

The land acquisition is in progress. Coal linkage application has been submitted to MoC. It is

proposed to implement the project on package basis to achieve significant cost reduction. The

plant is expected to achieve commercial operation in 2013.

300 MW Alaknanda Power Project:

The plant is 300 MW run – of – the – river hydroelectric facility, proposed to be constructed on

the Alaknanda River in the Chamoli district of the state of Uttarakhand. The company is required

to supply 12% of the net deliverable energy to the state of Uttarakhand free of charge as royalty.

Techno Economic Concurrence obtained from CEA and significant progress has been achieved

on land acquisition, clean development mechanism (CDM) registration and tendering for civil

works.

160 MW Talong – Londa Power Project:

The plant is a 160 MW run of the river hydroelectric facility to be constricted at the east Kameng

district of the state of Arunachal Pradesh. The company shall allocate 12% of the company’s

equity share to the government of Arunachal Pradesh at free of cost.

The company is required to provide 14% of power generated to the state at free of charge. Pre

construction investigations are completed. Detailed project report approval from CEA is under

process.

180 MW Bajoli Holi Power Project:

This plant is 180 MW run of the river hydroelectric facility to be constructed on the river Ravi at

the Chamba district of the state of Himachal Pradesh. The royalty payable by the company to the

state is 12% of the power produced during the first 12 years from the commercial operation date,

18% in the following 18 years and 30% thereafter.

Detailed project report preparations are under progress. Approval has been obtained from

government of Himachal Pradesh for shifting the project site from right to left bank leading to

reduction in project cost time.



250MW Upper Marysyangdi Power Project:

The plant is a 250 MW run if the river hydroelectric facility to be constructed on the river

Marysyangdi in Nepal. The company holds 80% of equity interest in Himtal, with remaining

20% with two individual shareholders. Site investigation and DPR preparation is in process.

300 MW Upper Karnali Power Project:

This plant is a 300 MW hydroelectric power facility to be constructed on the river Karnali in

Nepal for the power to be exported to India, pursuant to the MOU with the ministry of water

resources, government of Nepal.

73% of the equity interest of Upper Karnali is held by GMR Lion Energy Ltd, Mauritius,

subsidiary company and remaining 27% by National Electricity Authority (NEA), Nepal.

Detailed project report preparation under progress. Process initiated for obtaining the necessary

transmission survey license for evacuation of power to India.

Indonesian Coal Mines:

Acquired 100% equity interest in PT Barasentosa Lestari, or PT BSL having coal mine with

proven reserves of 104Mn MT. estimated reserves of coal is about 218Mn MT.

PT BSL has rights to develop two coal blocks located in the South Sumatra Province of

Indonesia over a period of 30 years following commencement of exploitation of these mines.

Production of coal from these coal blocks is expected to commence from 2011 and its proposed

to export coal to India for captive use.

South African Coal Mines:

The company had acquired a 10% stake in coal mining company, Homeland & Mining Energy

SA (PTY) Ltd, South Africa. Through a provision of MOU, company has acquired 33.53% stake

in the parent company viz Homeland Energy Group, which is listed on Toronto Stock Exchange

in Canada in exchange for the state in HMESA ltd, South Africa.



Homeland Energy Group Ltd. (HEG), through its subsidiaries has major interest in coal projects

in SA including an operating mine is also other investment in uranium Exploration Company.

2.2 McKINSEY 7’S FRAMEWORK:

The McKinsey 7S model involves seven interdependent factors which are categorized as either

"hard" or "soft" elements:

Hard Elements Soft Elements

Strategy

Structure

Systems

Shared Values

Skills

Style

Staff

"Hard" elements are easier to define or identify and management can directly influence them:

These are strategy statements; organization charts and reporting lines; and formal processes and

IT systems.

"Soft" elements, on the other hand, can be more difficult to describe, and are less tangible and

more influenced by culture. However, these soft elements are as important as the hard elements

if the organization is going to be successful.



1. Structure:

Its parent company GMR Infrastructure is listed in stock exchange. It has a chairman,

board of directors and a director for each field like finance, marketing and human

resources. The way the organization is structured and who reports to whom, i.e., staff in

each department reports to their immediate higher authority till the chairman and

directors.

2. Systems:

System means all the rules, regulations and procedures both formal and informal that

compliment the organisation structure. The flow of activities involved in the daily

operation of a business including its core process and its support systems. In GMR there

is a formal flow of communication in two ways i.e. top level to bottom level and bottom

to top. Each division has its own reporting system which integrates entire organisation

into corporate office. GMR has proper set of procedure for selecting right candidates to

the organisation.

3. Strategy:

Strategy of the company is to build upon the competitive strengths and business

opportunities to become a leading power and infrastructure company in India. They also

intend to pursue suitable opportunities in India, as well as other parts of Asia.

4. Shared Values:

The values and beliefs that drive the organization are:

Humility: We value intellectual modesty and dislike false pride and arrogance

Entrepreneurship: We seek opportunities they are everywhere

Teamwork and relationships: Going beyond the individual encouraging

boundaryless behaviour

Deliver the promise: We value a deep sense of responsibility and self discipline,

to meet and surpass on commitments made

Learning: Nurturing active curiosity – to question, share, and improve



Social responsibility: Anticipating and meeting relevant and emerging needs of

society

Respect for individual: We will treat others with dignity, sensitivity and honour

5. Skills:

The GMR possesses labour force with various skills. The company encourages and

provides training for the developments of skills, depending on the employees at operating

level and management level.

The employees at management level, posses skill for company administration, leadership,

motivation etc. They are also trained under various aspects like skill development,

behavioural department, fire and safety training.

At the operating level the employees possess various skills in relation of their jobs as well

as other aspects like self-development, first aid training fire and safety training, work

culture etc. All the employees are properly trained in order to improve their skills so as to

help them to contribute to maximum productivity.

6. Staff:

People are main asset of the organization. Organization performance mainly depends

upon individual’s performance who is working in the organization. So staffing plays

important role by right person in right job. Staffing is the process of acquiring human

resources for the organization and assuring that they have the potential to contribute to

the achievement of the organizations goals.

The work force at GMR is very skilled, 97% of the workforce is qualified with minimum

qualification being graduation on the administration side and diploma on the technical

side.

The personnel and administration department is responsible for recruiting people for

GMR. The most eligible candidate is selected and they are trained for a month and

promotion of the employees is based on the performance appraisal undertaken. The

employees of GMR are paid high salary.



7. Style:

Style is one of the factor from which manager of the organisation can bring organisation

change. The McKenzie framework considers style as more than the “style” of top

management. The management of GMR is closely associated with team building,

interpersonal interactions and human skills as the management style at GMR is domestic

in nature. The authority and responsibility of each employee is clearly defined at GMR.

Efficient employees are recognised and their performance is praised in the form of quick

promotion and attractive incentives. In GMR managers spend more time interacting with

various employees in various departments, it can be said to be democratic wherein the

employee are given full freedom to express what they think and sometime the discussion

of the employee with employee are also taken into consideration while making important

decisions.

2.3 ACCOUNTING POLICIES (GMR Energy Ltd.):

The principal accounting policies adopted in the preparation of those financial statements are

set out below. These policies have been consistently applied to all years presented in the

financial statements unless otherwise stated.

Going Concern Basis:

The company incurred a loss of US$ 24784 for the period from 1st April 2009 to 30th Sept 2009,

and, as of that date the company’s current liabilities exceeded its current assets by US$ 1874.

The company is dependent upon the continuing financial support of its parent company. The

parent company has indicated its intention to continue providing such financial assistance to the

company to enable it to continue as a going concern and to meet its obligations as they fall due.

Basis of preparation:



The financial statements of the company have been prepared in accordance with International

Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the

requirements of the companies’ law.

The company is not required by the companies’ law, to prepare consolidated statements because

the company and its subsidiaries constitute a small sized group as defined by the law and the

company does not intend to issue consolidated financial statements for the period from 1 st April

2009 to 30th Sept 2009. The European Commission has concluded that since parent companies

are required by the EU 4th Directive to prepare their Separate financial statements and since the

companies’ law, requires the preparations of such financial statements in accordance with IFRS

as adopted by the EU, the provision in IAS 27 “Consolidated and Separate Financial Statements”

requiring the preparation of consolidated financial statements in accordance with IFRS do not

apply.

The financial statements have been prepared under historical cost convention.

The preparation of financial statements in conformity with IFRS requires the use of certain

critical accounting estimates and requires management to exercise its judgment, in the process of

applying the company’s accounting policies. It also requires the use of assumptions that affect

the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at

the date of financial statements and the reported amounts of revenue and expenses during the

reporting period. Although these estimates are based on management’s best knowledge of

current events and actions, actual results may ultimately differ from these estimates.

Adoption of new and revised IFRS:

During the current period the company adopted all the new and revised international financial

reporting standards that are relevant to its operations and are effective for accounting periods

beginning on 1st April 2009. This adoption did not have a material effect on the accounting

policies of the company.

At the date of approval of these financial statements, standards and interpretations were issued

by the International Accounting Standards Board which was not yet effective. Some of them

were adopted by European Union and others not yet. The board of directors expects that the



adoption of these accounting standards in future periods will not have a material effect on the

financial statements of the company except for the application of the International Accounting

Standard 1 (revised) “Presentation of Financial Statements” which will have a material effect on

the presentation of financial statements and the application of IFRS 7” (Amendments) –

Financial Instruments Disclosures: Improving disclosures about financial instruments” which

will enhance disclosures about fair value measurements and liquidity risk.

Subsidiary Companies:

Investments in subsidiary companies are stated at cost less provision for impairment in value,

which is recognized as an expense in the period in which the impairment is identified.

Finance Costs:

Interest expenses and other borrowed costs are charged to the income statement as incurred.

Foreign currency translation:

Functional and presentation currency

Items included in the company’s financial statements are measured using the currency of

the primary economic environment in which the entry operates (the functional currency).

The financial statements are presented in United States Dollars (US$), which is the

company’s functional and presentation currency.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the

exchange rates prevailing at the dates of the transactions. Foreign exchange gains and

losses resulting from the settlement of such transactions and from the transaltion at year

end exchange rates of monetary assets and liabilities denominated in foreign currencies

are recognized in the income statement.



Financial Instruments:

Financial assets and financial liabilities are recognized in the company’s balance sheet when the

company becomes apart to the contractual provisions of the instrument.

Cash and cash equivalents:

For the purpose of the cash flow statement, cash and cash equivalents comprise cash at bank and

in hand.

2.4 FINANCIAL RISK MANAGEMENT:

Financial risk factors:

The company is exposed to liquidity risk and currency risk arising from the financial instrument

it holds. The risk management policies employed by the company to manage these risks are

discussed below:

Liquidity risk

Liquidity risk is the risk that arises when the maturity of assets and liabilities does not

match. An unmatched position potentially enhances profitability, but can also increase

the risk of losses. The company has procedures with the object of minimizing such losses

such as maintaining sufficient cash and other highly liquid current assets and by having

available and adequate amount of committed credit facilities.

Currency risk

Currency risk is the risk that the value of financial instruments will fluctuate due to

changes in foreign exchange rates. Currency risk arises when future commercial

transactions and recognized assets and liabilities are denominated in a currency that is not

the company’s measurement currency. The company is exposed to foreign exchange risk

arising from various currency exposures primarily with respect to the euro. The



company’s management monitors the exchange rate fluctuations on a continuous basis

and acts accordingly.

2.5 Regulations and Policies:

The company is engaged in the power and transport sector. In the power sector GMR is primarily

engaged in the business of generation and sale of electricity and related operations and

maintenance. The power generating companies are exposed to various regulations and policies in

India. In the transport sector, GMR is engaged in the business of development of roads and

airports. The special purpose vehicles established for carrying out the activities in the roads and

airport sector are subject to certain regulations in India.

Background:

The development of electricity industry in India was fashioned by two legislations, namely the

Indian Electricity Act, 1910 and the Electricity Supply Act, 1948. The Electricity Act, 1910

introduced a licensing system in the electricity industry whereas the Electricity Supply Act was

responsible for greater state involvement in the industry.

The Electricity Supply Act promoted state owned vertically integrated units through the creation

of the state electricity boards (SEBs). SEBs were responsible for generation, transmission and

distribution of electricity within the geographical limits of each state of the Indian Union where

SEBs were not setup, a government department was responsible for the electricity supply. It is

worthwhile to note that electricity comes under the concurrent list of the constitution of India and

both the state and central government have the power to legislate on “Electricity”.

In the early 1990s, the electricity sector was liberalized, following which private participation in

the generation sector was permitted by way of amendments to the Electricity Supply Act.

Subsequent to the amended legislation, several private sector players setup generating stations

and power purchase agreements were entered into between these independent power plants

(IPPs) with the SEBs.



In 1998, the Electricity Regulatory Commission Act,1998 (ERC Act) was enacted by the central

government. The ERC Act provided for the establishment of independent electricity regulatory

commission both at the central and state level. The regulatory commissions were setup to

rationalize electricity tariff and promote and regulate the electricity industry.

The Andhra Pradesh Electricity Reforms Act, 1998 was enacted by the state government for

restructuring the state’s electricity industry by unbundling the SEBs into separate generation,

transmission and distribution companies. Generation segment was considered as monopolistic

activities within the geographic area and regulates business. Licensing was chosen as the form of

regulatory control and the rate of return on investment was regulated. The Andhra Pradesh

Electricity Reforms Act, 1998 (and other reform legislations in different states) introduced a

single buyer model, where the transmission and supply licensees acted as the buyer of all

electricity generated by the generating companies and would sell electricity to the distribution

supply licensees for further supply and distribution. A single company controlled transmission

and both supply while a number of distribution companies enjoying monopoly supply rights in

their area of supply handled the distribution.

The Karnataka Electricity Reforms Act, 1999, was enacted to provide for, inter alia,

I. The constitution of an Electricity Regulatory Commission for the state of Karnataka.

II. The restructuring of the electricity industry in the state, the corporatization of the

Karnataka Electricity Board and the rationalization of the generation, transmission,

distribution and supply of electricity in the state;

III. Avenues of participation of private sector entrepreneurs in the electricity industry in

the state and generally for taking measures conducive to the development and

management of the electricity industry in the state in an efficient, economic and

competitive manner.

IV. Reliable quality power and to protect the interests of the customer.

The Electricity Regulatory Commission was vested with power to regulate the activities of the

power sector in the state and for the matters connected therewith or incidental thereto.



Salient features of the Electricity Act, 2003:

The Electricity Act, 2003 (“Electricity Act 2003”) come into effect from June 10, 2003 and

extends to the whole of India except the state of Jammu and Kashmir. The Electricity Act, 2003

is a central unified legislation that seeks to replace the multiple legislations that governed the

Indian electricity sector and provides for further material reforms in the sector. The Electricity

Act, 2003 expressly repeats the Electricity Act, 1910, the Electricity Supply Act and the ERC

Act. However, after the enactment of Electricity Act, 2003, the provisions of Andhra Pradesh

Electricity Reforms Act, 199 would continue to apply in Andhra Pradesh and Karnataka to the

extent that their provisions are not inconsistent with the provision of Electricity Act, 2003.

The most significant reform initiative under the Electricity Act, 2003 was the move from

multiple seller, single buyer model towards a multiple buyer, multiple seller system. In addition,

under the Electricity Act, 2003, the regulatory regime is more flexible, has a multiyear approach

towards tariff and allows regulatory commission greater freedom in determining tariff. Under the

electricity Act, 2003, penal provisions for dishonest use of electricity have also been tightened

and special courts have been envisaged for speedy dispensation of justice. The Electricity Act

has also been introduced power trading as a separate activity.

Generation:

Electricity generation has been de-licensed and any generating company can establish, operate

and maintain a generating station if it complies with the technical standards relating to

connecting with grid. Approvals from the Central Government, State Government and the

techno-economic clearance from the Central Electricity Authority (CEA) have been done away

with for any power plant, except for hydroelectric projects, which still requires CEA approval if

their capital cost is above a threshold which is determined by the central government from time

to time. Generating companies are now permitted to sell electricity to any licensees and directly

to consumers, subject to availing open access to the transmission and distribution systems and

payment of charges as may be determined by the appropriate regulatory commission.

In addition, no restriction is placed on setting up of a captive power plant by any consumer or

group of consumers for their own consumption. Under Electricity Act, 2003, captive users are



exempt from payment of surcharge for transmission and wheeling of power from the captive

plant to the destination of the use by the captive user.

The regulatory commissions have the right under the Electricity Act, 2003 to determine the tariff

for:

I. Supply of electricity from a generating company to any distribution licensee;

II. Transmission of electricity;

III. Wheeling of electricity and

IV. Retail sale of electricity.

The Central Electricity Regulatory Commission (CERC) has the jurisdiction over generating

companies owned or controlled by central government and those generating companies who have

entered into or otherwise have a composite scheme for generation and sale in more than one

state. The State Electricity Regulatory Commission (SERC) have jurisdiction over generating

stations within the state boundaries, except those under the CERC’s jurisdiction.

The Tariff Policy, 2006 notified by the Ministry of Power on January 6, 2006 states that all

future requirements of power for a distribution company would be procure through a competitive

bidding process. The ministry of power has clarified that the competitive bidding principles

would not apply for generating stations where, on or prior to January 6, 2006

I. The power purchase agreement has been signed and approved by the appropriate

commission or

II. Is pending before the appropriate commission or

III. Where ‘in principle’ clearance of the project cost and financing plan has been given by

the CERC or

IV. Where financial closure has been achieved.

Transmission:

Transmission, both at inter – state and intra – state levels, is a regulated activity requiring a

license. The Electricity Act, 2003 requires the central government to designate one government



company as the Central Transmission Utility (CTU), which would be deemed as a transmission

licensee. Similarly, each state government would designate one government company as the

State Transmission Utility (STU), which would also be deemed as a transmission licensee.

The CTU and STU shall be responsible for transmission of electricity; planning and coordination

of transmission system, providing non discriminatory open-access to any users and developing a

coordinated, efficient and integrated inter – state and intra – state transmission system

respectively. The electricity act, 2003, prohibits the CTU and STUs from engaging in the

business of generation or trading in electricity.

The Electricity Act, 2003 allows private generating stations open access to transmission lines.

This facilitates sale of power to distribution and trading licensees as well as directly to

consumers. The provision of open access is subject to the availability of adequate transmission

capacity as determined by the CTU/STU, as the case may be. Further, the open access consumer

has no pay charges for open access as may be applied by the appropriate commission.

Trading:

The Electricity Act, 2003 specifies trading as a licensed activity. Trading has been defined as

purchase of electricity for resale. This may involve wholesale supply (i.e., purchasing power

from generators and selling to the distribution licensees) or retail supply (i.e., purchasing from

generators or distribution licensees for sale to end consumers).

The license will be awarded by the appropriate commission, based on certain entry norms

relating to capital adequacy and technical parameters. However, the national and regional load

dispatch centers, Central and State Transmission Utilities and other transmission licensees will

not be allowed to trade in power, to prevent unfair competition. The appropriate commission also

has the right to fix in ceiling on trading margins in intra – state trading to ensure that the

electricity traders do not indulge in profiteering in situations of power shortage. The CERC has

stipulated that the current margins for traders holding inter – state trading license would not be

more than 4ps/kwh. Some regulatory commissions have also taken the view that a trading license

will be allowed to sell power to another trading licensee, to prevent escalation in the cost of

power.



Open access, together with recognition of power trading as a distinct business opportunity, is

expected to provide new intermediation opportunities between wholesale buyers and distribution

licensees and between generators and distribution licensees, as well as between generators and

consumers. At a bulk supply level, this provision will is expected to create competition and

enhance efficiency.

Distribution and Retail Supply:

The Electricity Act, 2003 does not make any distinction between distribution and retail supply of

electricity. Distribution is licensed activity and distribution licensees are allowed to undertake

trading without any separate license. Under Electricity Act, 2003, no license is required for the

purpose of supply of electricity. Thus a distribution licensee can undertake three activities:

trading, distribution and supply through one license.

The Electricity Act allows new licensees to enter distribution areas after acquiring licenses from

the regulator. Non exclusive licensing and provision for phased open access in distribution will

restrict monopolies in the distribution business. Open access to generators will be subject to a

surcharge to meet the current level of subsidy, in addition to wheeling charges. Several SERCs

have already specified regulations for open access. SERCs also have the flexibility to determine

the time frame for implementing open access in the retail segment, depending on subsidies and

readiness of the utilities. The SERCs also have the right to determine the various charges for

open access, i.e., transmission charge, transmission loss, wheeling charge, cross – subsidy

surcharge and additional surcharge.

The National Electricity Policy states that such charges should not be so onerous as to eliminate

open access altogether and the tariff policy lays down the formula for collecting cross – subsidy

surcharge for open access in order to bring about competition in the longer interest of the

consumer. Several regulatory commissions including the CERC have commented that the

National Tariff Policy should not impose a formula on all the regulatory commissions and it is

believed that the Ministry of Power would move a proposal soon for an amendment to the

National Power Tariff Policy, to ensure that cross subsidy surcharge for open access power will

not be at an uniform rate but set separately for each state.



Further under the Electricity Act, 2003 the surcharge has to be progressively reduced and

eliminated. It may be noted that it has been proposed (and which is pending before Parliament)

that the provisions under the Electricity Act requiring elimination of cross subsidies be amended

to require a reduction of cross subsidies.

Unregulated Rural Markets;

The licensing requirement does not apply in cases where a person intends to generate and

distribute electricity in rural areas as notified by the state government. However, the supplies

have to comply with the requirements specified by the CEA. In order to provide an impetus to

rural electrification, Electricity Act, 2003 mandates formulation of national policies governing

rural electrification and local distribution and rural off grid supply including those based on

renewable and other non – conventional energy sources.

Role of Key Organizations and Players:

Central and State Government:

The Electricity Act, 2003 reserves a significant involvement of the central government in the

functioning of the power sector. It has been assigned a number of duties, including planning and

policy formulation, rule making, appointing, establishing, designating authority, providing duties

and other tasks, funding, and issuing directions.

The central government designates a CTU and establishes the National Load Dispatch Center

(NLDC), Regional Load Dispatch Center (RLDC), the Appellate Tribunal for Electricity, The

Coordination Forum, and The Regulators Forum. It has the power to vest the property of a CTU

in a company or companies and decides on the jurisdiction of benches of the Appellate Tribunal.

It prescribes the duties and functions of the CEA, NLDC and RLDC, and can make rules on a

wide range of areas and has the power to remove difficulties through issue of orders within two

years of commencement of Electricity Act, 2003. It also has the power to amend the schedule of

states where reform legislation continues to be applicable.



The central government provides loans and grants to the CERC and decides on other sources of

funds for the CERC. It decides how the CERC should spend all its revenues and specifies the

manner the accounts should be maintained. The CERC is required to send its audited accounts to

the central government.

The central government is also responsible for, inter alia:

a) Specifying additional requirements of granting license to more than one distribution

licensee in the same geographical area;

b) Providing no objection certificates for granting license if the service area includes central

government installations such as cantonment, aerodrome, defense area, etc;

c) Demarcating the country into transmission regions for the purpose of inter – state

transmission;

d) Issuing guidelines for transparent bidding process;

e) Approving salary and benefits of the employees of the CEA, CERC and the Appellate

Tribunal;

f) Referring cases to the Appellate Tribunal for removal of members on the grounds of

misbehavior; and

g) Providing the procedures for inquiry into misbehavior by members.

The state government exercises appointing, designating powers, provides funds and makes rules

notifications, etc. It appoints the members of the SERC including the chairman, approves the

terms and conditions of appointment of the secretary to the SERC and other staff, and can

remove or suspend a member of the SERC. It is also responsible for constituting the selection

committee for appointing members of SERC. It establishes the SLDC, notifies the STU, vests

property of STU in companies, draws up reorganization of the SEB through acquiring its assets

and re-vests it through a transfer scheme. It can also transfer employees through a transfer

scheme. It is empowered to constitute special courts, and state coordination forum. The state

government creates the SERC fund and can provide loan or grants for running SERC. It decides

how the SERC should utilize the fund and how it should maintain accounts. The state

government can also provide subsidy to consumers, but Electricity Act, 2003 requires it to



corporate the licensee in advance by the amount of loss expected to be suffered by the licensee in

implementing the subsidy. The state government notifies rural areas where exemption of license

conditions would apply and issues directions to the SERC on public interest issues.

Central Electricity Authority:

The CEA was created under the Electricity Supply Act and the Electricity Act, 2003 retains the

agency, although it has been relegated to a consultative role. There was some overlap of duties

and power between the CERC and the CEA earlier, which Electricity Act, 2003 has removed.

The technical clearance required for power projects under the provision of the Electricity Supply

Act has been eliminated, except in cases of hydro projects above a certain capital investments.

Commissions:

Electricity Act, 2003 retains the two – level regulatory system for the power sector which was

established under the ERC Act and various state reform legislations. At the central level, the

CERC would be responsible for regulating tariff of generating station owned by the central

government, or those involved in generation or supplying in more than one states, and regulating

inter – state transmission of electricity. The State Electricity Regulatory Commission on the

other hand regulates intra – state transmission and supply of electricity within the jurisdiction of

each state. The CERC and the SERC are to be guided by the National Electricity Policy, Tariff

Policy and the National Electricity Plan while discharging their functions under Electricity Act,

2003. The commissions are also to be guided by any direction given by the central government

for CERC or the state government for the SERC pertaining to any policy involving public

interest. The decision of the government is final and non – challengeable with respect to the

question that whether directions pertain to policy involving public interest or not. The

commissions have been entrusted with a variety of functions including determining tariff,

granting licensees, settling disputed between the generating companies and the licensees. The

commissions are a quasi – judicial authority with power of a civil court and an appeal against the

orders of the commissions would lie to the Appellate Tribunal.



Appellate Tribunal:

Under the earlier electricity legislations, the high court was the appellate authority against orders

that are passed by the SERC. Under Electricity Act, 2003, the Appellate Tribunal has been setup

to as an appellate body against orders of the commissions or adjudicating officers in settling

disputes. No civil court has any jurisdiction over a matter which the Appellate Authority is

empowered to determine under the Electricity Act, 2003. The Appellate Tribunal has the power

to summon, enforce attendance, require discovery and production of documents, receive

evidence and review decisions. The orders of the Appellate Tribunal are executable as decrees of

a civil court. Appeals against the orders of the Appellate Tribunal lie with the Supreme Court.

Load Dispatch Centers:

Electricity Act, 2003 has created a three tier load dispatching system, namely a National Load

Dispatch Centre (NLDC), Regional Load Dispatch Centre (RLDC) and State Load dispatch

Centre (SLDC). The load dispatch centers are now separate government companies and they

cannot participate in trading or generation of electricity.

Special Courts:

To try offences like theft of electricity or electrical lines and equipment, Electricity Act, 2003

empowers the state governments to establish special courts with single judges for certain area or

areas.

Ombudsman for grievance redress:

The distribution licensee shall setup a grievance redressal system following the guidelines of the

SERC. Any consumer aggrieved by non – redressing of grievances can refer the case to an

ombudsman to be setup by the SERC. The Ombudsman is to settle the grievance of the consumer

within such time and in such manner as specified by the SERC.

Co-ordination Forum and Forum of Regulators:

This forum shall be constituted by the central government for the smooth and coordinated

development of the power system in the country. The state government shall also constitute a co-

ordination forum for the state to ensure smooth and coordinated development of the power



system in the state. The Central Government has formulated sales to coordinate the formation

and functions of this forum.

Consumer Protection: Standards of Performance:

The appropriate commission can set standards of performance of each licensee or a class of

licensees after consulting the licensees and the affected parties. A licensee failing to meet the

performance standards may have to pay compensation or may be prosecuted as determined by

the commission. The penalty is payable within 90 days of decision. The standards of

performance can be different for different licensees. The licensees are required to submit

information about their performance to the commission and the commission shall arrange to

publish them at least once a year.

2.6 Accounting for the General Mining Industry

INTRODUCTION:

1. There are four main activities in general mining industry:

a) Exploration;

b) Development and Construction;

c) Production; and

d) Processing.

Enterprises in the general mining industry can be formed as integrated entities

undertaking exploration, development and construction, production and processing, or as

independently segregated entities.

2. The nature and characteristics of general mining industry are different from other

industries. The main differences are as follows:

a) The exploration of mineral resources is an activity carrying a high degree of

uncertainty. In spite of careful preparation coupled with high costs, there is no



assurance that the activity will result in the discovery of mineral reserves that are

commercially feasible to be mined.

b) Mining resources are by nature non – renewable and depletive. To conduct a

mining activity, from exploration phase until processing phase, requires relatively

high investment costs, intensive capital over a long period, significant risks and

advanced technology, upto the point where professional management is

necessary.

c) In general, mining operations are located in isolated areas and their activities

cause damage to and/or pollute the environment. Hence, mining enterprises are

responsible for fulfilling the statutory environmental regulations besides having a

clear post mining concept.

d) The Indonesian government does not issue mining concessions because according

to prevailing regulations, all mineral resources in Indonesia belong to the

Indonesian people and are to be used to increase the prosperity of the Indonesian

people. In order to operate in the general mining industry, the Indonesian

government sets regulations which authorize entities or individual to conduct a

general mining activity.

3. In mining industry, there are possibilities for joint efforts based on Contract of Work and

Contract of Cooperation, either in terms of capital or joint operations.

4. As a result of the nature and characteristics of the mining industry, there are some

specialized accounting treatments for the mining industry that differs from those for other

industries, especially in accounting for exploration costs, development and construction

costs, production costs and environmental management costs.

SCOPE

5. This statement was prepared based on the nature and characteristics of general mining

industry in Indonesia and to be guided by the basic financial accounting concepts covered

by the financial accounting standards and statutory regulations.



6. Similar to financial accounting standards, this statement should be applied in the

presentation of financial statements for external parties by every enterprise in the mining

industry, including contractors under Contract of Work or Contract of Cooperation in the

field of general mining. With this statement, both the preparer as well as the user of

financial statements is required to follow the same accounting standard. If the accounting

treatment is general in nature, then it still should be in accordance with financial

accounting standard.

7. For purposes of and in relation with this statement, general mining operations are

segregated into four phases of activity:

a) Exploration (including valuation)

b) Development and Construction

c) Production, and

d) Environmental Management

EXPLORATIONS

Definitions:

8. The terms used in the statement are defined as follows:

“Exploration” is the effort expended in the search for, discovery and evaluation of proven

reserves in a specific mining area during a specific time period in accordance with

statutory regulations.

“Proven Reserves” represents estimates of general mining reserves in an area of interest

which technically, as well as economically, can justify the possibility of production in the

future based on the price of the general mineral resource at the date of estimation and its

mining costs.

“Area of Interest” represents a geological area which is expected to have the potential to

yield general mineral reserves or has been proven to yield general mineral reserves.



9. An enterprise in a general mining industry may have more than one area of interest, and

in certain area of interest may occur more than one phase of activity at the same time.

10. Every area of interest has to be treated separately for the purpose of determining whether

the costs incurred during exploration and development activities can be capitalized or

expensed in the current period.

Description of Activities:

11. General Survey: A general survey involves is a general geological or geophysical studies

conducted on the land, beneath the sea and/or from air for the purpose of the drawing of a

geological map or verifying the existence of mineral resources.

12. Permit and Administrative: permit and administrative represents activities performed in

managing the permit to conduct exploration activities in a specific area, including the

managing of the Mining Authority Right, Contract of Cooperation, Contract of Work,

Land Authority and Administrative of Exploration Activities.

13. Geology and Geophysical: Geological activities include analyzing aerial photographs and

the geological mapping of land surfaces with the purpose of mapping the spread of

minerals. Geophysics is one form of exploration technology utilizing the physical

characteristics of rock surveyed for purposes of extracting date from below the earth’s

surface.

14. Explorational Drilling: Drilling is used to obtain detailed data on the deposits below the

earth’s surface. Based on laboratory examination of the drilling samples, the type and

content of the deposit can be determined. The results from several drilling samples can be

correlated for the same type of rock and the amount of general mineral reserves can also

be calculated.

15. Evaluation: Evaluation is the process of determining the technical feasibility and

commercial viability of a particular mineral reserve. Activities during this phase include



determining the volume and grade of the reserve, analyzing the impact on the

environment, reviewing the permit required, reviewing the mining methods, reviewing

production process, conducting transportation surveys, reviewing infrastructure required,

reviewing budgetary required, as well as reviewing the market value of the reserve and

production plans.

16. The primary exploration costs, either directly or indirectly related to the exploration

activities are as follows:

a) General survey

Costs incurred under the general survey stage include:

i. Literature study cost;

ii. Cost to obtain satellite data and aerial photograph;

iii. Geological mapping costs;

iv. Sampling costs; and

v. Cost for analyzing surface samples.

b) Permit and Administrative Requirements

Costs incurred with regard to permit and administrative requirements include

i. Costs for acquiring Mining Authority;

ii. Costs for acquiring Contract of Cooperation;

iii. Costs for acquiring Contract of Work;

iv. Costs for compensation of land and vegetation; and

v. Exploration administrative costs.

c) Geological and Geophysical

Costs incurred during geology and geophysical include:

i. Side Looking Air Radar (SLAR) costs;

ii. Field geological costs;

iii. Chemistry geological costs, including analysis of laboratory test;

iv. Gravitational examination costs;

v. Magnetic examination costs; and



vi. Seismic examination costs.

d) Exploratory Drilling

Costs incurred under exploratory drilling include:

i. Area preparation costs, including cost of constructing the entrance

road to drilling location;

ii. Drilling costs, including drilling equipment;

iii. Mobilization and demobilization costs;

iv. Testing and finishing costs; and

v. Logistic cost incurred during drilling activities.

e) Evaluation

Costs incurred during evaluation activities

Accounting Treatment

17. Costs incurred in connection with exploration and evaluation activities in an area of

interest should be expensed in the current period, except when one of the following

conditions is met, then the costs can be deferred:

a) Permit to conduct exploration in the area of interest is still valid and

exploration activities have not been completed at the balance sheet date, as

well as significant exploration activities in the area of interest are still in

progress, which upto the point no determination can be made as to whether

the exploration will result in the discovery of a proven reserves;

b) Permit to conduct mining activities in the area of interest is still valid and it

can be proven that the exploration costs incurred will be recovered through

the production of Proven Reserves or from the results which will be

obtained through transferring the mining rights to another party.

18. Depreciation cost on fixed assets that support exploration activities are allocated as part

of exploration costs.



19. If a general survey is not related specifically to a particular exploration program, the cost

incurred for that general survey should be expensed in the current period.

20. Interest costs incurred as a result of financing exploration activities are deferred (as long

as the exploration costs can also be deferred) in accordance with statement of financial

accounting standard No. 26, Accounting for Interest during Construction Period.

21. General and Administration costs directly related to exploration activities are also

deferred as part of “Deferred Exploration Costs”.

22. Other income obtained in relation with exploration activities is deducted from “Deferred

Exploration Costs”.

23. For Amortization for Deferred Exploration Costs refer to paragraph 31(e).

24. The present value of Deferred Exploration Costs should be estimated and reported as

stated in paragraph 50.

Presentation of financial Statements:

25. The total amount of exploration costs expensed in the current period (excluding the

amortization cost on the Deferred Exploration Costs) is presented separately in the

income statement as Exploration Expenses.

26. The Deferred Costs related to exploration activities are presented as Deferred Exploration

Costs.

Disclosure:

27. The following items should be disclosed in the notes to the financial statements:

a) Accounting policies in connection with the basis for:



i. Deferred Exploration Costs for exploration activities still in progress

with an exploration on the duration of the contract for the related area

of interest;

ii. Deferred Exploration Costs for an exploration activity which has

discovered Proven Reserves with an exploration that the amortization

will be recorded when production commences.

b) The Deferred Exploration Costs for exploration activities still in progress

and the deferred exploration costs for exploration activities that have

discovered proven reserves should be presented separately;

c) If there is more than one area of interest, the details of deferred exploration

costs for each area of interest should be disclosed;

d) The total amount of exploration costs expensed in the current period and

the reasons for expensing.

Developing and Construction:

28. The terms used in this statement are defined as below:

“Development” includes all the activities conducted in the preparation of proven reserves

until commercial production.

“Construction” is building facilities and infrastructure to conduct and support production

activities.


29. The development and construction stage includes administrative and technical activities.

Administrative activities represent activities performed in managing the permit required

in general mining to support the implementation of development and construction.

Technical activities include planning activities and stripping activities to gain access to

the mineral reserves as part of the preparation for production activities.

Type of Costs:



30. The primary type of development and construction costs, either directly or indirectly

related to development and construction activities are as follows:

a) Development Costs

Costs incurred during development activities include:

i. Administrative Costs:

Costs of managing permit and the mining authority

Land excavation costs;

ii. Land clearing costs; and

iii. Mine opening costs, including stripping the land surface before

production.

b) Construction Costs

Costs incurred during construction activities include:

i. Infrastructure establishment costs

ii. Building establishment costs; and

iii. Machinery and equipment costs.

Accounting Treatment:

31. Development costs consists of:

a) Costs incurred in connection with development activities in a certain area of

interest, either directly or indirectly, are deferred as Deferred Development

Costs;

b) Depreciation costs on fixed assets used in conducting development activities

are deferred as part of deferred development costs;

c) General and Administrative costs which are directly related to development

activities are deferred as a part of deferred development costs. General and

administrative costs which are not directly related to development activities

should be treated as expenses in the current period.



d) When production in an area of interest commences, accumulated deferred

development costs and accumulated deferred exploration costs for the same

area of interest are totaled, and the total amount of these costs is amortized.

The amortization cost is expensed as part of production costs.

e) Amortization is calculated based on the unit of production method. Under

certain circumstances, the amortization is calculated based on the estimated

useful economic life of the area of interest if it is considered to result in more

accurate financial information. The basis for calculating of amortization

should be applied consistently. If the unit of production method is used, the

amortization rate each year should be based on the reasonable reserves which

could be produced until the end of the operation period of that area of

interest. If the amortization is based on the passage of time, then the

estimated economic useful life should not be longer than the operation

period. The operation period is based on the prevailing permit.

f) If the production in certain area of interest is delayed after development

activities are completed, then at the end of each accounting period during the

delay, the accumulated deferred development costs and accumulated

deferred exploration costs should be evaluated as to whether these costs can

be recovered from the estimated production value of the reserves. If it is

evident that the estimated production value is lower than the deferred costs,

then the difference should be expensed in the current period. The methods

and factors used in performing the evaluation one stated in paragraph 50.

32. Construction cost

All costs incurred in connection with construction and infrastructure work are capitalized

as fixed assets and depreciated based on the economic useful life of the assets. The point

in time when depreciated commences and is changed to expense can be determined as

follows:



a) For fixed assets directly used in the production process, depreciation is

calculated when commercial production commences and the depreciation

cost is expensed as production costs.

b) For fixed assets not directly used in the production process, depreciation

commences when the construction of the fixed assets is completed and the

depreciation cost is expensed as part of operating expense in the current

period.

33. Interest cost incurred in connection with financing development and construction

activities are deferred or capitalized in accordance with statement of financial accounting

standard no. 26, accounting interest during construction periods.

Presentation of Financial Statements

34. Deferred development costs are presented in the balance sheet along with deferred

exploration costs (for exploration activities which have discovered proven reserves) as

deferred exploration and deferred development costs.

35. For accounting periods where commercial production has commenced, deferred

exploration and development costs are presented in a net amount, after deduction for

amortization.

36. The amount of write down resulting from evaluating the deferred exploration and

development costs, as described in paragraph 31(f) is presented separately in the income

statement as a write down of deferred exploration and development costs.

37. Costs relating to construction and infrastructure activities which are still in progress are

presented as construction in progress.

Disclosure:

38. The following information should be disclosed in the notes to the financial statements.



a) Accounting policy relating to:

i. The basis for determining the deferral of development costs and

capitalization of construction and infrastructure costs;

ii. The amortization methods applied with an explanation on the

duration of the mining permit and estimated economic useful life of

the mine.

b) Deferred Development Costs for development activities that are still in

progress

c) Deferred exploration and development cost where there is a delay in

production, including explanation:

i. Reasons for the delay,

ii. Amortization has not been calculated because the production value

has been estimated; and

iii. The amount of write down, if any, resulting from the evaluation of

the deferred costs, and the method and basic assumptions used in

calculating this write down.

d) When there is more than one area of interest, the deferred exploration and

development costs for which area of interest should be disclosed.

Productions:

Definitions:

39. The terms used in mining production (operation) activities are defined as follows:

“Production” includes all the activities ranging from extracting proven reserves up to

when they are ready to be sold, used or processed further.

Description:



40. Mining production activities include: stripping, extracting, washing and cleaning, and

transporting the mineral resource to the collection station.

a) Stripping during the production period includes harrowing/pushing,

excavating/loading and transporting soil from excavation location to the

filling location or other location.

b) Extracting the mineral resources using methods in accordance with the

nature and characteristics of the related minerals such as: excavation,

spraying with water, using bulldozers and shovels, dredging and blasting.

c) Washing of minerals, including activities conducted to clean and separate the

minerals from other minerals or by – products such as soil, ash, sand, clay,

sulfur, mud and other impurities. Washing is performed by means of water,

chemicals, machinery such as jigs or filters. Washing includes the process of

breaking large chunks of minerals into the desired size for eventual sale or to

be processed further.

d) Transporting minerals from the mine site to collection station is performed

by using conveyor belt, carrying lorry, dump truck, barge or ship.

Same mining enterprises can conduct more extensive processing in addition to the

processes outlined above.

Types of Costs:

41. The primary mining costs, either directly or indirectly related to the production activity,

are as follows:

a) Stripping during the production period

Costs incurred during stripping include:



i. Stripping costs;

ii. Cost for acquiring filling site; and

iii. Costs of filling after the stripping process.

b) Mineral Extracting

Costs incurred in the extraction include:

i. Excavation costs;

ii. Spraying costs;

iii. Dredging or blasting costs; and

iv. Filling costs.

c) Mineral Washing

Costs incurred during the mineral washing include:

i. Costs of washing and separating minerals from the by – products;

ii. Costs of shaping the minerals into standard measurement/size which

has been determined by the industry.

d) Minerals Transporting

Represents the costs incurred in transporting the minerals from mining

location to the collection station.

e) Environmental Management

Represents the costs incurred in connection with maintaining the

environment.


42. All costs incurred in connection with production are recorded as Work in Process.

43. Costs of goods manufactured include production cost after taking into account beginning

and ending balance of Work in Process.



44. Cost per unit of inventory is calculated based on the average method or the first – in first

– out method.

45. Inventories include work in process, finished goods and ancillary materials.

46. There are two kinds of stripping costs: the initial stripping which is conducted before

production commences, and the ongoing stripping which is conducted during the

production period. The initial stripping costs are part of Deferred Development Costs,

and ongoing stripping costs are expensed as production costs.

Before the commencement of production, the average stripping ratio is calculated.

The average stripping ratio is the ratio of the estimated rock/land cover layer to

the estimated amount of mineral content (such as coal) stated in unit quantity.

47. The ongoing stripping costs are normally expensed as production costs based on Average

Stripping Ratio. In situation where the Actual Stripping Ratio (which is the ratio between

the quantity of land/rock which has been stripped for certain period and the quantity of

reserve produced for the same period) is not significantly different from the average ratio,

the whole stripping costs incurred during the period can be expensed as production costs.

When the actual ratio is significantly different from the average ratio, as in the

case when the actual ratio is higher than average ratio, the excess stripping costs

is deferred and recorded as deferred stripping costs. In addition, these deferred

costs are expensed as production costs in periods where the actual ratio is

significantly lower than the average ratio.

48. If there is a change in the average stripping ratio, this change is considered a change in

estimate.

49. During the production period, frequent evaluations should be made regarding the estimate

of the proven reserves which could be produced, and the additional estimated



development costs which would be required to produce these reserves in the future. These

estimates from the basis for amortization of deferred exploration and development costs.

50. The reasonableness of deferred exploration and development costs balance should be

evaluated at the end of the accounting period by comparing it to present value of

estimated mineral production during the remaining useful life of the mine (the remaining

useful life should not be longer than the operation as written in the permit). If it is evident

that the estimated production value is lower than that deferred cost balance, the difference

should be expensed in the current period.

Presentation of Financial Statements:51. Inventory is presented in the balance sheet using the lower of acquisition cost or market

value. The market value is the estimated selling price at the balance sheet data reduced by

the estimated expense incurred in connection with selling the product.

52. The total amount of the write down from the deferred exploration and development costs

is presented in accordance with paragraph 36.

Disclosure:53. The following information should be disclosed in the notes to the financial statements:

a) Accounting policy relating to:

i. Method of determining costs of inventory and the basis for valuation;

ii. Method of expensing the stripping cost; and

iii. Method of calculating the average stripping ratio.

b) The total amount of deferred stripping costs with an explanation of the

differences between the actual stripping ratio and the average ratio.

c) The change in the average stripping ratio (if any)

d) Disclosures as stated in paragraph 38(c)



Environmental Management:

Definitions:

54. “Environment” means a continuum with all objects, energy, conditions and living

organisms, including human beings and their behavioral characteristics, which influence

the existence and prosperity of human beings and other living organisms.

55. With the existence of mining activities in a certain location the effects on the

environment around the mining includes, but is not limited to, the following:

a) Environmental pollution means the entrance on insertion of living organisms,

substances, energy and the other components into the environment and/or the

change in the ecosystem by man’s activities or natural processes up to the

point where the quality of the environment has been diminished or cannot

function to perform its intended purpose.

b) Environmental damage means actions that results directly or indirectly in

changes to characteristics and/or biological make up of area so that it ceases

to support the continuing development.

As effort to lessen and control the negative effects of mining on the environment,

environmental management should be conducted which includes a concerted effort in the

presentation, arrangement, maintenance, control and development of the environment.


56. Activities conducted in environmental management include but are not limited to:

a) Preparing analysis of environmental impact documents;



b) Effort to prevent the pollution of review by leakage from mines by building

sediment pools around the excavation location, dumping area and stockpile.

Included in this activity is draining mud from the sediment pools;

c) Landscaping is conformed to topographical and hydrological conditions.

These activities include:

i. Shaping slope gradient to lessen runoff, erosion, landslides

and sedimentation;

ii. Shaping drainage so water does not flow to certain areas to

limit erosion;

d) Topsoil management are activities conducted in remaining and preserving

topsoil from the mining location and piling it so that it can be reused in the

reclamation of the former completed mining site;

e) Revegetation is the replanting of the former mining site where the original

vegetation has been destroyed or tampered with;

f) Erosion control is activities encompass planting of grass, building terraces,

spreading rocks, building deflection canal, etc.

g) Preventing dust pollution includes spraying water on roads leading to the

production area, the loading station and stockpile, and spraying other

potentially dusty locations;

h) Preventing landslides by reducing the gradients of slopes, building slopes

and dikes;

i) Researching the soil and plants to determine appropriate planting technique;

j) Monitoring water quality from sediment pools drainpipes and rivers near the

mine.



k) Monitoring the quality at the mining locations, employee’s quarters and the

surroundings;

l) Monitoring the land quality in the dumping areas;

m) Monitoring locations that have lost their vegetation as well as revegetation

areas;

n) Monitoring the result of environmental control and management efforts; and

o) Monitoring the rate of erosion.

Types of Costs:

57. Environmental management costs include, but are not limited to, costs related to activities

described above. Basically, these costs are costs in building environmental management

infrastructure, costs arising from efforts to reduce and control the negative impact of

mining activities, and other routine costs.


58. The costs of building environmental management infrastructure are capitalized as fixed

assets and depreciated systematically based on the economic useful life.

59. Estimated environmental management liabilities should be accrued, if the following

condition are met:

a) There is clear indication that an obligation has been incurred at the balance

sheet date resulting from activities which have already been performed;

b) There is a reasonable basis to calculate the amount of the obligation incurred.



60. The estimated cost for environmental management as a result of explanation and

development activities is accrued by debiting the deferred environmental management

costs and crediting liability (provision) for environmental management. The deferred

costs are amortized as the commercial production commences; the amortization expense

is recorded as production cost.

61. The estimated cost for environmental management as a result of production activities is

expensed as production cost by crediting the liability (provision) for environmental

management.

62. Payment of environmental management liabilities in the current period is recorded as a

reduction of the estimated liability for environmental management.

63. At balance sheet date, the amount of estimated liability for environmental management

should be reevaluated to determine whether the amount of accrual is adequate.

64. If the actual environmental management expenditure for the current period relating to

activities from the periods are greater than the accrued amount, the difference should be

charged to the production cost in the period in which the differences arises.

Presentation of Financial Statements:

65. Estimated liability for environmental management should be presented in the balance

sheet at the accrued amount less actual expenditure.

Disclosures:

66. The following information should be disclosed in the rates to financial statements:

a) Accounting policies on:

i. Accounting treatment on expensing environmental management

costs;

ii. Authorization method for deferred environmental management costs;

and

iii. Depreciation method of environmental management infrastructure.



b) The activity in the estimated liability for environmental management in the

current year showing:

i. The beginning balance;

ii. The provision made;

iii. The actual expenditures; and

iv. The ending balance.

c) Environmental management activities which have been conducted and are in

progress.

d) Contingent liabilities in connection with environmental management and

other contingent liabilities as described in the financial accounting standards.

Transition:

67. The change arising from the application of this statement does not constitute a cumulative

effect of a change in accounting policy. Therefore, in preparing financial statements

adapting this new method, the previous periods ending balance will be the beginning

balance for the current period.

68. The estimated remaining liability for environmental management relating to prior

activities (the difference between estimated total liabilities and the actual expenditures) is

expensed prospectively from the effective date if this statement through a systematic

amortization over the remaining useful life of the mine and is represented after operating

profit items. The amortization method and duration should be disclosed in the notes to the

financial statements.

2.7 Factors Affecting the Performance of the Company:

The business of GMR, results of operation and financial condition are affected by a number of

factors, including:



1) Macroeconomic Factors in India

All the assets of GMR group are located in India. As the revenues from the existing

projects are all fixed, we believe that macroeconomic factors, including the growth of

Indian economy, interest rates, as well as the political and economic environment, may

not currently have a direct significant impact on our business, results of operations and

financial condition. We believe that the Indian economy will grow in the next few years

and, consequently, we are currently developing, and expect to continue to develop,

projects whose revenues are dependent on the growth in Indian economy. Accordingly,

we believe that macroeconomic factors in India will, in the long run have a significant

impact on our operating results.

2) Asset Mix:

We currently own three types of operating assets: power plants, annuity road projects and

airport projects. We are increasing our asset mix through the development of an

international airport, three toll roads, one annuity road and hydroelectric power plant. We

are also evaluating opportunities in, among other things, the power trading business, the

power transmission and would consider opportunities for entry into distribution business;

the coal powered fired business, the captive mining business and the development and

modernization of other roads. We believe this increase in our asset mix will enable us to

benefit from the expected growth in different sectors within the power and infrastructure

sectors.

3) Customer Mix:

We generate revenues largely from customers in the public sector. With the

commencement of our commercial operation of the Delhi Airport project, our customer

base has expanded into the private sector. We expect that, once the road projects and the

Hyderabad airport project enter into commercial operation, our customer base will

expand and will be able to sell more services to customers in the private sector. This in

turn would help to reduce the level of market risk to which we are exposed.

4) Effect of price volatility and availability of fuel:



Under the power purchase agreements relating to the Mangalore Power Plant and the

Chennai power plant, we are entitled to be reimbursed for our fuel costs based on certain

agreed parameters. If prices for naphtha or LSHS continue to be high in comparison to

other types of fuel, we may experience difficulty in securing new long term purchase

commitments, or renewing our existing purchase commitments, in each case once our

existing power purchase agreements expire and, accordingly, our earnings could be

adversely impacted. We are currently evaluating our fuel options, including the use of

alternate fuels as well as relocation of the Mangalore power plant to a site that is close to

a natural gas source. The Vemagiri power plant will rely on combustion of natural gas for

generation of electricity. While we have procured the supply of natural gas to Vemagiri

power plant, we expect that the plant will not have sufficient fuel to operate at its

contracted capacity the first 20 to 24 months of operations.

5) Income Tax:

Except for DIAL, each of our subsidiaries that has developed, or is developing, an

infrastructure project has been granted a 10 year tax concession by the government,

during which time such subsidiary is only subject to Indian income tax at the minimum

alternate tax rate, instead of the normal income tax rate. The relevant subsidiary may at

its option decide on the commencement date of the 10 year tax concession. The amount

of current income tax payable does not currently affect the financial performance of

GMR Energy and GMR Power as under the power purchase agreements for Mangalore

power plant and Chennai power plant, the power purchasers are required to reimburse as

for any current income tax paid (excluding tax on other income, if any). However, if the

income tax rates for our road and airport businesses change, our results of operations

would be impacted.

6) Investments in our new projects:

We plan to make significant investments in a number of new projects over the next

several years: two airports, three toll roads, an annuity road project, a hydroelectric power

plant and other projects that we may win following competitive bids. If the development



of these project costs substantially less than what we have budgeted, or if we are able to

complete these projects ahead of schedule, our financial conditions and earnings could

improve. Conversely, if we are unable to complete these projects in accordance with our

budgets, or if these projects, once built, do not operate profitably, our financial condition

and earnings could be adversely affected.

7) Ability to borrow funds at competitive rates:

Power and infrastructure projects, by their nature, are typically capital intensive and may

require high levels of debt financing. We have in the past been able to raise debt

financing on terms acceptable to us. We believe that, with the continued growth of our

businesses and reputation in the power and infrastructure sectors, we may be able to

obtain debt financing on competitive terms. However, if for any reason we are unable to

obtain adequate finances in a timely manner and on acceptable terms or at all; our

financial conditions and earnings could be adversely affected.

2.8 Risk factors:

Risk factors associated with the business of GMR:

We rely substantially on state owned entities for our revenues. Political or financial

pressures could cause them to force us to renegotiate our contracts and could adversely

affect their ability to pay us.

A large portion of our existing operations are dependent exclusively upon revenues from

a small number of customers.

Due to the fact that the power purchasers for the Mangalore and Chennai power plants

have not arranged for letter of credit to be issued in favor of our lenders, we are not in

compliance with our loan agreements and as a result, our lenders may accelerate our debt.

We are a party to a significant number of legal proceedings, including a dispute

pertaining to the bidding process of the Delhi airport project.



The development of new projects is subject to construction, financing and operational

risks.

In the event one or more of the state governments that guarantee payment under our

power purchase agreements are not able or willing to perform their obligations under

such guarantees, we would be required to initiate legal proceedings against such

governments.

Even if our customer do not comply with their obligations under the power purchase

agreement for the Mangalore power plant, we are still required to purchase naphtha under

our supply agreement and to pay our operations.

The power purchase agreement for the Mangalore power plant expires in the coming year

and we will need to secure alternative arrangements.

Each of the Mangalore power plant, the Chennai power plant and the Vemagiri power

plant relies on a single supplier of fuel as well as external operations for its operation and

maintenance.

We are subject to significant contractual risks under our power purchase agreement with

our power purchasers.

Certain government interests as our regulator, customer, joint venture partner and indirect

competitor give rise to conflict of interest which may harm us.

Fluctuations in the price and availability of fuel could adversely affect our power

operations.

Our flexibility in managing our operations is limited by the regulatory environment in

which we operate.



Our operation, management and development of the Delhi airport are subject to a number

of risks.

We are a holding company with investments in our subsidiaries and are not directly

involved in any business operations.

We may encounter problems relating to the operations of our joint venture.

Our lenders have significant rights to determine how we conduct our businesses.

We require certain approvals or licenses in the ordinary course of business, and the

failure to obtain or retain them in a timely manner or at all may adversely affect our

operations.

The operation of power plants and infrastructure assets involves many risks and we may

not have any sufficient insurance coverage to cover our economic losses.

Our businesses have and will have substantial capital requirements and may require

additional financing in the form of debt or equity to meet our budgetary and operating

expenses, and we may not be able to raise the required capital.

We have substantial indebtedness and will continue to have substantial indebtedness and

debt service obligations following the offering.

We have pledged, or have agreed to pledge, a large portion of the shares we hold I our

major subsidiaries in favor of the lender, who may take control of such subsidiaries upon

the occurrence and continuance of a default under the relevant financing documents.

Restrictions on foreign investments in certain infrastructure sector limit our ability to

raise debt or equity investment outside India.



Each og GMR Energy, GMR Power, Vemagiri Power and GHIAL is subject to loan

agreements pursuant to which its lenders may convert any amounts that such entity has

failed to pay into equity of such entity.

Our future success depends on our ability to achieve and mange growth.

Our ability to develop a profitable power trading business is dependent on the success of

our price risk management strategies.

Increases In interest rates may materially impact our results of operations.

Infrastructure projects array many risks, which, to the extent they materialize, could

adversely affect our businesses.

Demand for power and infrastructure services in India depends on domestic and regional

economic growth.

We face margin pressure as a large number of power and infrastructure related contracts

are awarded by the central and state governments following competitive bidding process.

We depend on the expertise of our senior management and skilled employees, our result

of operations may be adversely affected by the departure of our senior management and

experienced employees.

Our operations are, and in the next few years will continue to be dependent on a small

number of operating assets. If the operation of one or more of these assets is disrupted, it

would have material adverse effect on our financial condition and results of operations.

Our controlling shareholders and certain officers may take actions that are not in, or may

conflict with, our or our shareholder’s best interest.

Our long term agreements expose us to certain risks.



If the operation of our assets do not meet certain agreed performance requirements, we

may be liable for penalties.

Changes in technology may render our current technologies obsolete or require us to

make substantial capital investments.

Forward looking information may prove inaccurate.

Risks associated with Investments in Indian Economy:

A slowdown in economic growth in India could cause our business to suffer.

Any downgrading of India’s debt rating by a domestic or international rating could have a

negative impact on our business.

Political instability or changes in the government could adversely affect economic

conditions in India generating and our business particular.

Terrorist attacks and other acts of violence or war involving India, the United States, and

other countries could adversely affect the financial markets, result is a loss of business

confidence and adversely affect our business, prospects, financial condition and results of

operation.

If communal disturbances or riots in India, or if regional hostilities increase, this

adversely affect the Indian economy, the health of which our business depends upon.

We are subject to risks arising from exchange rate fluctuations.

2.9 ECONOMIC CONDITIONS:

The global economic crisis has affected the Indonesian economy and caused the capital and

financial market to collapse as reflected in the decrease of the composite index, depreciation of



the Rupiah against the US Dollars and tight liquidity in the banking industry. The worsening

economic condition is estimated to have further impact on various industries and real industries

sector in the year 2010.

Economic improvements and sustained recovery are dependent upon several factors, such as

fiscal and monetary actions being undertaken by the government and others, actions that are

beyond the control of the company and the subsidiary.

As per this year’s consolidated financial statements, the company and subsidiaries net worth

showed accumulated deficit and capital deficiency of Rp 2,091,891,974 and Rp 14,583,085,625

as of March 31, 2010 and Rp 26,689,907,076 and Rp 21,036,950,398 as of March 31, 2009.

PT Bersentosa Lestari (BSL), the company’s subsidiary coal property remains in the exploration

phase and is consistently in need of capital injection for its exploration costs. To cover that cost

and the incurred capital deficiency, the ultimate shareholder of the company has committed to

provide funding through stockholder loans in a form of Mandatory Convertible Bonds to PT

Dwikarya Sejati Utama, the company stockholder until BSL has started its commercial operation

and generate income on its own.

The company itself has suffered losses from operations and depends on ongoing financial

support from its ultimate controlling stockholder. Ultimate recovery of the company’s assets and

its ability to pay its liabilities depends on the successful development of BSL. To overcome this

condition, the company’s plan to speeding up BSL commercial operation. At present, the

company has been received an approval on its production feasibility study from Department of

Energy and Mineral Resources, and has been appointing the third party consultant to assist the

company in obtaining the approval for environmental impact study in order to get construction

permit. Once the company has completed part of the construction, it will be granted an

exploitation license.

The company is dependent upon the continuing financial support of its ultimate controlling

stockholder. The accompanying consolidated financial statements do not include the effect of

any adjustments that may be required if the company cannot continue as a going concern for the

foreseeable future. These plans include the ability to defer payment of current liabilities to the



company’s ultimate controlling stockholder, which has confirmed to management that it will not

recall those current liabilities to the determinant of the company.

The consolidated financial statements have been preferred on going concern basis, and do not

include any adjustment that might results from the outcome of the uncertainties. Related effects

will be reported in the financial statement as they become known and can be estimated.

There is no event subsequent to consolidated balance sheet date until the date of this report occur

that give rise to the uncertainties of the company and subsidiary going concern as an impact of

the worsening current economy of Indonesia.



3.1 SCOPE OF WORK

I’ve been Assigned the task of analysing the financial statements of the foreign companies under

the energy sector of GMR group.

Firstly I would do the ratio analysis of GMR Energy Limited to find out the liquidity status and

the profitability status of the company. Then I will compare the ratios of GEL with other players

in the market including both private sector such as Reliance Power and public sector such as

NTPC.

Then I will do the comparitive analysis of the company. By this way I will know how exactly

GEL is coping up with the other competitors and their growth in this energy sector in these

subsequent years.

Finally I will submit the report including the findings and recommendations.

3.2 OBJECTIVES OF THE STUDY

• To analyze the evolution of power sector in India.

• To assess the profitability, liquidity and other financial ratios of the company when

compared to the industry.

• To compare the performance of the company with respect to the top players in this sector.

3.3 METHODOLOGY OF THE STUDY

• No field work in collection of primary data for the study and the study is going to be

descriptive and analytical.



• Secondary information is obtained by the medium of internet, journals, articles, annual

reports and reports from the company.

3.4 SOURCES OF DATA

Only secondary data was collected from the internet, company websites, magazines and various

articles. Capitaline databases have been the main source of information for company analysis as

well as the annual reports provided by the company.

3.5 LIMITATIONS OF THE STUDY:

As per the work done at the company were not allowed to put up in the report that is to be

submitted for the college.

The financial statements that were analysed were of the current and previous fiscal year.

The financial statements used were of their foreign subsidiaries located in Cyprus, South

Africa, Mauritius and Indonesia, since the statements were not published for public use it

was allowed to be taken out of the company for any other use except for the company

purpose.

The financial ratios used for analysis of performance of the company are limited.

Because of this though the work was done on their foreign sector for the report the parent

company’s performance analysis had to be showed rather than the foreign subsidiaries on

which the work was done.

TOOLS USED FOR ANALYSIS:

Ratio analysis



3.6 RATIO ANALYSIS:

Financial ratio analysis can reveal much about a company and its operations. However, there are

several points to keep in mind about ratios. First, a ratio is a "flag" indicating areas of strength or

weakness. One or even several ratios might be misleading, but when combined with other

knowledge of a company's management and economic circumstances, financial analysis can tell

much about a corporation. Second, there is no single correct value for a ratio. The observation

that the value of a particular ratio is too high, too low, or just right depends on the perspective of

the analyst and on the company's competitive strategy. Third, financial ratios are meaningful

only when compared with some standard, such as an industry trend, ratio trend, a trend for the

specific company being analyzed, or a stated management objective.

KEY RATIOS:

Debt to equity ratio:

A debt-to-equity ratio, which is the total debt of an entity divided by the total equity of that

entity, is a measure of the use of leverage or a measure of risk. Leverage is the use of other

people's money to make money. In its simplest form, it is borrowing money from someone at a

stated interest rate (such as 8%) and then investing that money in a project that earns a greater

return than this stated rate (such as a 12% return). Leverage results in great profitability--when it

works--because an entity is earning profits without having to invest any of its own money to get

that return. The greater an entity's debt-to equity ratio, the greater is the use of other people's

money to make money. The greater an entity's debt-to-equity ratio, the greater is the opportunity

for high returns for that entity. The debt-to-equity ratio is also a measure of risk since the more

debt that is used, the greater the risk that the entity might be forced to liquidate and go out of

business.



Current Ratio:

An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the

more liquid the company is. Current ratio is equal to current assets divided by current liabilities.

If the current assets of a company are more than twice the current liabilities, then that company is

generally considered to have good short-term financial strength. If current liabilities exceed

current assets, then the company may have problems meeting its short-term obligations.

Fixed Asset Turnover:

A long-term, tangible asset is held for business use and not expected to be converted to cash in

the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.

A high fixed asset turnover is preferred since it indicates a better efficiency in fixed assets

utilization.

Inventory turnover:

It‘s a ratio showing how many times a company's inventory is sold and replaced over a period.

This ratio measures the stock in relation to turnover in order to determine how often the stock

turns over in the business. It indicates the efficiency of the firm in selling its product. It is

calculated by dividing the cost of goods sold by the average inventory. Inventory represents one

of the most important assets that most businesses possess, because the turnover of inventory

represents one of the primary sources of revenue generation and subsequent earnings for the

company's shareholders/owners. Possessing a high amount of inventory for long periods of time

is not usually good for a business because of inventory storage and obsolescence costs. However,

possessing too little inventory isn't good either, because the business runs the risk of losing out

on potential sales and potential market share as well. The days in the period can then be divided

by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or

"inventory turnover days".



Interest Cover Ratio:

It is a ratio used to determine how easily a company can pay interest on outstanding debt. The

interest coverage ratio is calculated by dividing a company's earnings before interest and taxes

(EBIT) of one period by the company's interest expenses of the same period. The lower the ratio,

the more the company is burdened by debt expense. When a company's interest coverage ratio is

1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio

below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

RETURN ON EQUITY

Return on shareholder’s equity is calculated to see the profitability of owner’s investment. The

shareholder’s equity or net worth will include paid – up share capital, share premium and

reserves and surplus less accumulated losses. ROE indicates how well the firm has used the

resources of owners.

RETURN ON ASSETS

It shows how profitable a company’s assets are in generating revenue. It gives an indication of

the capital intensity of the company.



4.1 SWOT ANALYSIS:

Strengths

India has the fifth largest electricity generation capacity in the world

Transmission & Distribution network of 6.6 million circuit km - the third largest in the

world.

Potential for growth in this sector (demand exceeding supply)

Increasing focus on renewable sources of energy

Government presence in the sector (encouraging entry of foreign players)

No barriers to entry

Weaknesses

Public sector players are only into generation of power

Large demand-supply gap: All India average energy shortfall of 9% and peak demand

Shortfall of 14%

Lack of exposure of entrepreneurs to handle international contracts

Inexperience of SEBs to handle changing market environment in addition to their weak

financial condition



Unavailability of fuel and unwillingness of fuel suppliers to enter into bankable contracts

Lack of necessary infrastructure to transport and store fuel, high cost risk involved in

transporting fuel

Opportunities

Huge population base

Opportunities in Generation Ultra Mega Power Plants (UMPP)– 9 projects of 4000 MW

each.

Coal based plants at pithead or coastal locations which are untapped.

Hydel power potential of 150,000 MW is untapped as assessed by the Government of

India.

Renovation, modernization, up-rating and life extension of old thermal and hydro power

plants.

Threats

Competition to domestic players from foreign Pvt. players as 100% FDI permitted by

government in Generation, Transmission & Distribution

Not a lucrative option for investors (ROE)

Rise in price of raw materials

Tariffs are distorted and do not cover cost



4.2 PORTER’S FIVE FORCE MODEL:

Supply

Many projects have been planned but due to slow regulatory processes, especially in the

distribution segment, the supply is far lesser than demand. Currently, India needs to double its

generation capacity in the next 7 to 10 years to meet the potential demand.

Demand

The long-term average demand growth rate is 6% to 7% per annum and is expected to grow at

faster rate in the future.

Barriers to Entry

Barriers to entry are high, especially in the transmission and distribution segments, which are

largely state monopolies. Also, entering the power generation business requires heavy

investment initially. The other barriers are fuel linkages, payment guarantees from state

governments that buy power and retail distribution license.

Bargaining Power of suppliers

Not very high as government controls tariff structure. However, this may change in the future.

Bargaining Power of customers

Bargaining power of retail customers is low, as power is in short supply. However government is

a big buyer and payment by government can be erratic, as has been seen in the past.



Competition

Not high currently. The Electricity Act 2003 aims to encourage investments, thereby increasing

competition.

4.3 RATIO ANALYSIS:

Debt to Equity Ratio:

Year 2009 2008 2007 2006 2005D/E Ratio 0.2 0.21 0.45 0.72 0.98Industry Avg. 0.76 0.83 0.9 0.66 0.72

Table 4.1

2009 2008 2007 2006 20050

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0.2 0.21

0.45

0.720000000000001

0.98

0.760000000000003

0.830000000000001

0.9

0.660000000000003

0.720000000000001

D/E Ratio

GELInd Avg

Fig 4.1: D/E Ratio

Interpretation:

If we look into the graph we can see that there is a steady decrease in debt to equity ratio in the

past five years. But when compared with the industry average the company has maintained a

higher debt to equity ratio in the year 2005 and 2006 whereas in 2007 to 2009 the ratio is lower



than the industry average. The company started taking lesser debt and the operations are

managed and funded from the parent company. We can also say that the company has enough

funds to pay back their obligations. If the company has to compete with the major players in the

industry they have to use the proportion of debt and equity in proper manner.

Since this requires high capital for its operations as well as for investments for expansion, it is

good to go for a higher proportion of debt so that there is a great opportunity to get higher returns

for the company. And also the demand for power is high in India and there is always a demand

supply mismatch.

Current Ratio:

Year 2009 2008 2007 2006 2005Current Ratio 2.05 1.41 1.63 1.12 1.57Industry Avg. 1.66 1.58 1.48 1.62 1.56

Table 4.2

2009 2008 2007 2006 20050

0.5

1

1.5

2

2.5

2.05

1.41

1.63

1.12

1.571.66 1.58

1.481.62 1.56

Current Ratio

Fig 4.2: Current Ratio



Interpretation:

A higher current ratio means that the company will be able to pay its debts maturing within a

year. On the other hand, a low current ratio points to the possibility that a firm may not be able to

pay its short term debts. A low ratio would mean inadequacy of working capital which may deter

smooth functioning of an enterprise.

The current ratio of the company when compared for the past five years from 2005 to 2009, there

has been a decrease from 1.57 in 2005 to 1.12 in the year 2006 this is due to increase in current

liabilities is higher than the increase in current assets because of which the liquidity position of

the company has been decreased. And also the year 2006 was when the company went for IPO.

Though the short term liabilities of the company have been increasing there was a decrease in the

current assets during the year 2008 and hence the current ratio has declined in comparison with

the previous year. In the year 2009 the ratio has increased to 2.05 because of increase in current

assets as well as decrease in their liabilities. By this we can say that the company has been able

to pay back their short term liabilities.

The current ratio of the company in comparison with the industry average, we can see that except

for the years 2006 and 2008 the ratio is higher than the industry average. This shows that the

liquidity position of the company is good with respect to the other companies in the industry.

Fixed Asset Turnover Ratio:

Year 2009 2008 2007 2006 2005FAT Ratio 1.09 0.81 0.6 0.51 0.42Industry Avg. 0.49 0.55 0.59 0.43 0.41

Table 4.3



2009 2008 2007 2006 20050

0.2

0.4

0.6

0.8

1

1.2 1.09

0.81

0.600000000000001

0.510.42

0.490.55 0.59

0.43 0.41

FAT Ratio

Fig 4.3: FAT Ratio

Interpretation:

This ratio indicates the efficiency with which the company is utilizing its investments in fixed

assets and in generating sales. When looking at the company the ratio has been increasing year

after year, this shows that the company is able to utilize their fixed assets in generating sales in a

efficient manner. In comparison with the industry average the ratio is higher for the company in

the past five years. This shows that in the coming years the company can utilize their fixed assets

in a proper way for investments.

Inventory Turnover Ratio:

Year 2009 2008 2007 2006 2005Inventory Turnover Ratio

137.8 96.97 53.18 47.46 46.45

Industry Avg. 13.65 15.6 17.1 12.74 13.44Table 4.4



2009 2008 2007 2006 20050

20

40

60

80

100

120

140137.8

96.97

53.1847.46 46.45

13.65 15.6 17.1 12.74 13.44

Inventory Turnover Ratio

Table 4.4: Inventory Turnover Ratio

Interpretation:

Here we can see that the ratio has been increasing for the past five years. This shows that the

company has been able to convert their inventories into sales in an efficient manner. In power

sector inventory means coal in case of thermal power plants and also spares and others. If we

look from the year when the company started their commercial operation this ratio has been

increasing this shows that the company is utilizing their inventories in an efficient manner in

generating sales by generation of electricity and its sales. This is also because the company is in

agreements with certain state governments in selling their power under power purchase

agreement for long period of time. Hence the generation of electricity and its sales is always

increasing as the demand for power is increasing.

When comparing with the industry average for the past five years we can see that the ratio of the

company is much higher than the industry average. Thus the company is in much better position

when compared with other companies in the sector.



Interest Coverage Ratio

Year 2009 2008 2007 2006 2005Interest Coverage Ratio

3.24 2.77 2.99 2.23 1.91

Industry Avg. 3.54 3.74 3.09 3.51 3.35Table 4.5

2009 2008 2007 2006 20050

0.5

1

1.5

2

2.5

3

3.5

43.24

2.772.99

2.231.91

3.543.74

3.09

3.513.35

Interest Coverage Ratio

Fig 4.5: interest coverage ratio

Interpretation:

The interest coverage ratio indicates whether the company is having enough funds to pay the

interest charges on their outstanding debts. A company with ratio lower than 1 indicates that the

company is not having enough funds to pay back their interest expenses on their outstanding

debts. If we look at the company GMR Energy Limited, the company is having enough funds to

pay back their debts. The operating profit of the company has been decreasing gradually for the

past five years because of the increase in expenditure and also the interest expense has been

decreasing in comparison with the operating profit of the company. We can see that the ratio has

been maintained at around 2 and above for the past years, this shows that the company is having

enough funds to pay back their outstanding debts.



But when comparing with the industry average the interest coverage ratio of the company is low

for the last five years. This is because the expenditure incurred by the company is more in

comparison with earnings earned. The company can still improve its performance and increase

its earnings by reducing the expenditure incurred so that the company can meet up with the

industry average. Overall the company is performing well.

Return on Equity:

Year 2009 2008 2007 2006 2005ROE (%) 7.03% 3.45% 7.38% 7.15% 10.09%Industry Avg. 9.21% 8.99% 9.45% 8.92% 9.12%

Table 4.6

2009 2008 2007 2006 20050

2

4

6

8

10

12

7.03

3.45

7.38 7.15

10.099.21 8.99 9.45

8.92 9.12

ROE

Fig 4.6: ROE

Interpretation:

This ratio shows that how well the company is using the owner’s funds to generate profits. We

can see that the company is able to utilize the funds in an efficient way to generate profits. We

can see that there has been gradual decrease in ratio from the year 2005 to the year 2009. This

because of the decrease in profits of the company from the year 2005 to 2006 and then again



from the year 2007 to 2008. This was because in the year 2008 the agreement with Karnataka

state government on the purchase of electricity from Mangalore power plant was expired. This

was because GMR Energy Ltd got most of its revenue from this power plant. But still in

comparison with other companies on a similar scale of operation GEL has been performing well,

and also utilizing the owner’s funds in an efficient manner to generate profits.

When comparison with the industry average the ratio of the company is lower, this is because the

power sector in India, the majority of the sector in controlled by the state and central government

bodies. And also the investors prefer to fund these companies as there are better chances in

getting returns from them. And for the company to compete with these major players it would to

take some time as well as because of the regulations and policies instilled by the government of

India.

Return on Assets:

Year 2009 2008 2007 2006 2005ROA 0.04 0.02 0.04 0.04 0.06Industry Avg. 0.06 0.06 0.06 0.06 0.06

Table 4.7

2009 2008 2007 2006 20050

0.01

0.02

0.03

0.04

0.05

0.06

0.04

0.02

0.04 0.04

0.060.06 0.06 0.06 0.06 0.06

ROA

Fig 4.7: ROA



Interpretation:

This ratio shows how much the company earns on their total assets. In the power sector the

return on assets is normally considered to be low. We can see that there has been hardly any

change in the ratio for the company. The decrease in ratio during the year 2008 is because of the

investment by GEL in acquiring mines in South Africa. When compared with the industry

average though the ratio of the company is low, there is only a small difference between them.

Quick Ratio:

Year 2009 2008 2007 2006 2005Quick Ratio 3.89 0.83 1.93 1.77 2.62Industry Avg. 1.73 1.72 1.62 1.56 1.50

Table 4.8

2009 2008 2007 2006 20050

0.5

1

1.5

2

2.5

3

3.5

43.89

0.830000000000001

1.931.77

2.62

1.73 1.72 1.62 1.56 1.5

Quick Ratio

Fig 4.8: Quick Ratio

Interpretation:

This ratio indicates the immediate position or instant debt paying ability of a firm than that

indicated by the current ratio. Here we can see that there was a decrease in the ratio from 1.93 in

the year 2007 to 0.83 in the year 2008. This was because the current assets of the company were



converted into cash for investment in their business, i.e., acquiring of mines from South Africa

for their operations in their foreign subsidiaries. The ratio then again increased to 3.89 in the year

2009 as the current liabilities of the company has been decreased as well as there was an increase

in their current assets.

When compared with the industry average the ratio is much higher, i.e., 3.89 in the year 2009 for

the company when compared with 1.73 for the industry. Similarly for the previous years other

than 2008 as the company went for foreign investment. Hence we can say that the company is in

a better liquidity position.

Tax Burden Ratio:

Year 2009 2008 2007 2006 2005Tax Burden Ratio 0.92 0.95 0.89 0.92 1.13Industry Avg. 0.84 0.79 0.84 0.86 0.87

Table 4.9

2009 2008 2007 2006 20050

0.2

0.4

0.6

0.8

1

1.2

0.920.950000000000

0010.89 0.92

1.12999999999999

0.840000000000001

0.79

0.840000000000001

0.860000000000001

0.870000000000002

Tax Burden Ratio

Fig 4.9: Tax Burden Ratio



Interpretation:

The tax burden ratio of the company in comparison with the industry average for the past five

years is higher. This shows that tax burden on the company is less as the profits earned by the

company is comparatively less than the major players in this industry. Hence the ratio is almost

equal to one, i.e., profit after tax is almost equal to profit before tax. Here the difference is small.

This shows that GEL is not operating on a large scale in this sector as they are having lesser

number of power plants.

4.4 Comparative Analysis:

The analysis is done for the fiscal year 2008-2009. The companies selected to compare GMR

Energy Limited’s performance are:

NTPC

Power Grid Corporation of India Ltd.

Tata Power Company Ltd.

Reliance Infrastructure Ltd.

The basis of selection of these companies is based on sales provided by them. As well as they are

one of top 10 major players in this industry.



ANALYSIS:

Debt to Equity:

GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0

0.20.40.60.8

11.21.41.61.8

2

0.2

0.54

1.77

0.49 0.55

0.760000000000002

D/E

Fig 4.10: comparative analysis of D/E Ratio

Interpretation:

If we look in the graph we can see that the debt to equity ratio of all the companies except Power

Grid is less than the industry average. This ratio shows how efficiently the company uses its debt

component with respect to its equity. In the year 2009 the debt component of each company has

increased considerably along with that the reserves has also been increased considerably but

proportion in which both the reserves and debt is maintained is considerably more when

compared between Power Grid and other companies. The company has been utilizing its funds in

a proper way. And also since the company is into interstate transmission systems and grid

management they are always into electrification in the rural areas for which funds are required.

Hence they are utilizing their debts into this whereas other companies they are more into

generation of electricity than into distribution hence they use less debt as they distribution is

mostly taken care by Power grid. Out of all the five companies with respect to industry average



GMR has the lowest ratio. This shows that they can improve their performance by proper

utilization of debt and equity component.

Current Ratio:


0.5

1

1.5

2

2.5

3

2.05

2.72

0.690000000000001

1.82 1.76 1.66

Current Ratio

Fig 4.11: comparative analysis of Current Ratio

Interpretation:

Power grid is having lower current ratio in comparison with industry average in the year 2009.

This show the company is not in a good liquid position. This ratio shows how fast the company

can convert their current assets into cash to meet up their short term obligations. In this NTPC is

in having a higher ratio compared to others. Even very high ratio shows that the company is not

efficiently utilizing their resources. Here both NTPC and GMR are having ratio above 2, one of

the reasons is that NTPC is going for expansion, i.e., both nuclear as well as project expansion

and GMR they are having eight new projects in hand, this why they are maintaining a high

current ratio for their future requirements.



Fixed Asset Turnover Ratio:


0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1.09

0.730000000000001

0.17

0.940000000000001

1.63

0.49

FAT

Fig 4.12: comparative analysis of FAT Ratio

Interpretation:

The fixed asset turnover ratio of all the companies except Power Grid is relatively higher than

the industry average. This shows that the companies are able to generate more sales from the

investment in fixed assets. This shows that they are utilizing their fixed assets in an efficient

manner. Where as in Power grid the utilization of fixed assets in generating sales is less and their

major part of fixed assets is the plant and machinery and distribution system. Out of all the five

companies’ reliance infra is most efficient in utilizing its fixed assets.



Inventory Turnover Ratio:


20

40

60

80

100

120

140

160137.8

14.1924.09

13.0326.55

13.65

Inventory Turnover

Fig 4.13: comparative analysis of inventory turnover ratio

Interpretation:

This ratio shows how fast the companies convert their inventory into sales. All the five

companies are performing well in comparison to the industry average. Out of these GMR is

having a much higher ratio this shows that GMR is able to convert their inventory in much faster

rate. We can also see that inventory portion of GMR is much less when compared with other

companies. As it is new into this sector the amount raw materials kept by the company is less.

Even though keeping the inventory too low is not good for the business as it might loss the

potential sales. Hence GMR has to use the inventory efficiently in order to maintain their sales as

well as generating more revenue.



Interest Coverage Ratio:


1

2

3

4

5

6

3.24

5.63

1.88

3.34

4.61

3.54

ICR

Fig 4.14: comparative analysis of interest coverage ratio

Interpretation:

This ratio indicates how well the company can pay back their outstanding debts. Looking into the

graph we can say that all the five companies are at a better position since the ratio is above 1.5.

This indicates that they are having enough funds to pay back their interest expenses though

Power Grid is having a ratio lower than the industry average. Hence we can say the companies

are at good financial position to pay their interest expenses.



Return on Equity:


2

4

6

8

10

12

14

16

7.03

13.69

11.3910.61 10.24

9.21

ROE(%)

Fig 4.15: comparative analysis of ROE

Interpretation:

This ratio indicates how well the firm has used the resources of owners. This shows the earning

of a satisfactory return. This ratio is of great interest to the present as well as prospective

shareholders as this gives an idea about how return the shareholder is getting on their investment.

In the graph we can see that the ratio of all the companies except GMR is higher than the

industry average. GMR has 7% in the year 2009 whereas the industry average is 9.2%. The

company has to take effective measures in their utilization of owner’s investment.



Return on Assets:


0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.04

0.08

0.07 0.07

0.05

0.06

ROA

Fig 4.16: comparative analysis of ROA

Interpretation:

In comparison to the industry average all the companies are performing well as there is hardly

any difference in their ratios. But still the ratio is low since they are not able to utilize their assets

in an efficient way to generate revenues. One of the reasons is that the power plants are not able

to use their fuels which are used in generating electricity in an efficient manner. In a thermal

power plant they for efficient generation of electricity they have to get high quality coal only

then they can utilize the fuel to 100%. But this is not possible has it would also increase per unit

cost of electricity which wouldn’t be advisable as per the current state in India. Other option to

get higher returns is that they get in to nuclear power generation such that there would be

efficient utilization of fuel which could also lead to higher returns on the assets of the company.

But this is capital intensive.



Quick Ratio:


0.51

1.52

2.53

3.54

4.53.89

2.66

0.770000000000002

1.951.54 1.73

Quick Ratio

Fig 4.17: comparative analysis of Quick Ratio

Interpretation:

This ratio also indicates the liquidity position of the company. We can see that except Power

Grid other four companies are at much better position and are having higher ratios in comparison

with the industry average. Since NTPC and GMR are going for expansion and new projects they

have a higher ratio for their short term investments. Because of this higher ratio they can convert

assets in to liquid cash immediately when needed. They can also meet their current obligations.



5.1 FUTURE PROSPECTS:

The Eleventh Plan (2007-12) called for the addition of 78,000 MW of power from all sources. It

is unlikely that this target will be realized, though a late surge during the past few years has

resulted in the rapid addition of generating capacity. It is envisioned that the final capacity

addition at the end of the Eleventh Plan will be somewhere between 60,000 and 65,000 MW.

The Twelfth Five-Year Plan (2012-17) is even more ambitious, calling for the addition of over

100,000 MW of power. Planners are confident of realizing this target given that the policy

reforms of the Electricity Act would have had time to play out; leading to greater private sector

participation is concerned.

It is undeniable that the liberalization process initiated by the Electricity Act involving greater

private sector participation cannot be reversed. Indeed, private sector participation in power

generation is expected to increase from 10% during the Eleventh Plan to 34% during the Twelfth

plan. Thus while the government is heavily investing in ramping up the capacities of the state-

owned National Thermal Power Corporation (NTPC) and the National Hydro Power Corporation

(NHPC), which until now were the predominant thermal and hydro power producers,

respectively, power sector liberalization has led to a rapid increase in the number of private-

sector players and a resultant decrease in the share of power produced by state-owned

enterprises.

Another policy reform that has been recently enacted is the de-linking of NTPC and Bharat

Heavy Electricals Limited (BHEL), where supply of power generating equipment is concerned.

As a result, NTPC is not obliged to generate all its generating equipment from BHEL.

Consequently, private sector power equipment manufacturers have a tremendous opportunity to

sell equipment to India’s largest power generator. The same applies to NHPC, the country’s

largest hydro power generator. This has led to several private-sector players, domestic and

foreign, ramping up their production capacities in India and entering into joint ventures to

competitively bid for supply of equipment for power projects.

Another interesting development that has taken place is India’s aggressive pursuit of regional

power trading agreements with neighboring countries. These agreements were earlier limited to

Bhutan, whereby India financed the construction of hydropower plants in that country, in return



for the export of excess power generated to India. Such agreements are being extended to Nepal

and Bangladesh for the development of hydro and gas-based power plants, respectively. It is

expected that by 2020 over 20,000 MW of power will be procured from external sources. While

earlier agreements required capital equipment to be sourced from BHEL and the power to be

generated by government entities, power equipment will hereafter be sourced through

competitive bidding, while generation will largely be through structured finance arrangements

underwritten on a case-by-case basis by the Indian government. Policy planners are very

optimistic about the prospects of such agreements as it represents a win-win situation for both

power exporters, who would benefit from the export revenue and power-hungry importers like

India.

Despite full liberalization, foreign players have not entered the power-generation market with the

same enthusiasm as power-equipment manufacturers, preferring to adopt a cautious approach.

The first positive step in this direction is the decision by China Light and Power Company to set

up a 200 MW coal-fired plant in the north-western state of Haryana. On the other hand, domestic

power producers such as Reliance Power, Tata Power, Jindal Steel & Power and several other

companies have aggressively entered the generation space and have ambitious plans to expand

existing capacities.

5.2 MAJOR FINDINGS:

Most of the SEBs though are supported by state government, are running under loss. This is

because of power theft, transmission losses, and use of conventional methods for power

generation and transmission and out dated management policies.

Indian power sector has been witnessing a wide demand – supply gap. Although

electricity generation has increased substantially, it has not been able to meet the demand.

India is going to build an additional capacity of 1 lakh MW by 2012 including private sector

contribution.

In a bid to bring structural transformations, necessary reform programs should be carried out

in distribution and transmission process.



India possesses a vast opportunity to grow in the field of power generation, transmission, and

distribution. The target of over 150,000 MW of hydel power germination is yet to be achieved.

By the year 2012, India requires an additional 100,000 MW of generation capacity. A

huge capital investment is required to meet this target. This has welcomed numerous power

generation, transmission, and distribution companies across the globe to establish their

operations in the country under the famous PPP (public-private partnership) programmes. The

power sector is still experiencing a large demand-supply gap. This has called for an effective

consideration of some of strategic initiatives. There are strong opportunities in transmission

network ventures - additional 60,000 circuit kilometers of transmission network is expected by

2012 with a total investment opportunity of about US$ 200 billion.

5.3 RECOMMENDATIONS:

Despite the positive intention displayed by successive governments in reforming the power

sector, there are certain serious shortcomings within the power sector in India, both structural

and administrative, which it is hoped will be addressed soon:

Transmission capacity lags behind generation capacity, with the result that the power

generated often cannot be evacuated. This has created considerable opportunities for the

private sector and several domestic companies like Larsen and Toubro, Reliance

Infrastructure and Kalpataru Transmission Systems, as well as foreign companies such as

Areva T&D, are ramping up capacity for producing transmission equipment in India.

Supplies of coal and gas to the private sector have yet to be completely streamlined,

though the government has constituted a high-power committee to address this issue,

which is expected to turn in its recommendations shortly. This is a relatively minor

problem given that foreign firms can source fuel from abroad, subject to foreign

exchange clearance.

Land acquisition is a problem. It has been recommended that the CEA purchase land of

suitable size, which generation companies could bid for. Progress on this count has been

tardy.



The problem of ‘open access’ persists, as does the merchant power facility, both

permitted by the Electricity Act. Given that power is a concurrent subject, states retain

the authority to deny open access. For example, the two most industrialized states in

India, Maharashtra and Gujarat, allow both open access and merchant sales, while

Karnataka, a fairly advanced state and India’s Information Technology hub, and do not.

The Power Ministry in India has recently tabled a parliamentary note, mandating open

access. The granting of open access is expected to greatly enhance interest among private

power-generating companies.

The financial situation of most SEBs is still parlous and so generating companies are still

anxious about recovering payments on power sales to these boards, though the federal

government underwrites some of these sales. The present arrangement is that any

financial bailouts of the SEBs is deducted from the allocations made to the respective

states, thereby adding pressure on states to be more responsible in ensuring effective

metering of supplies and minimal Transmission and Distribution (T&D) losses.

A bigger problem to reform is the resistance of SEBs to unbundling, fearing that

unbundling would make it easier to identify the source of financial losses. SEBs are also

reluctant to part with exclusive rights to T&D, widely seen as the most lucrative

businesses in the sector, despite the abolition of exclusive privilege by the Electricity Act.

Private sector companies are aggressively petitioning the government to be allowed entry

into T&D as well, so as to be able to provide end-to-end solutions to consumers. A

resolution of this issue in favor of greater private sector participation in T&D is expected

soon.



5.4 LEARNING OUTCOME:

During the eight weeks of internship program in GMR Energy Limited one of the few things I

have learned across is commitment towards your work and towards your company. This will

inturn help in the years ahead in the company as well as the corporate world.

During the work done at GMR Energy Limited (foreign sector) I have learnt how the foreign

transactions are taking place between the Indian party and the foreign party, and also the role of

RBI in such kind of transactions.

Also on how an intimidation is given to the RBI if any transactions are to be made and the role of

authorized dealers in such transactions and also I learned various ways in which a company’s

financial performance can be gauzed and how conclusions are drawn from the ratio analysis.

And also on how the company looks into all the possibilities and the risk factors in the market

that would affect the company both internally and externally while going for an IPO.

5.5 CONCLUSION:

In this study an attempt is made to analyse the financial performance of the company and as a

result it is seen that the overall performance of the company is satisfactory. The analysis and

interpretation of various data and the operations of the company helped to reach a conclusion

that the efficiency of the company and profitability position is in good shape. But it is also seen

that the company can improve its performance as there is lot of demand of electricity and the

supply cannot be matched. There are lot of opportunities in the power sector as the company

have not entered into the nuclear and wind. As the company is getting enough investments from

foreign parties this could help them in investing in new projects as generation of electricity using

nuclear power is getting commercialized. The company should focus on this and analyze the

factors responsible for it and on how to take actions on implementation. The company should

continue to enforce strict and possible measures in every sphere of its activity to improve its

financial performance for better prospects in the coming days which again requires better short

term fund and long term fund management.



ANNEXURE:

GMR Energy Limited:

Year 2009 2008 2007 2006 2005D/E Ratio 0.2 0.21 0.45 0.72 0.98Current Ratio 2.05 1.41 1.63 1.12 1.57FAT Ratio 1.09 0.81 0.6 0.51 0.42Inventory Turnover Ratio 137.8 96.97 53.18 47.46 46.45Interest Coverage Ratio 3.24 2.77 2.99 2.23 1.91ROE (%) 7.03% 3.45% 7.38% 7.15% 10.09%ROA 0.04 0.02 0.04 0.04 0.06Quick Ratio 3.89 0.83 1.93 1.77 2.62Tax Burden Ratio 0.92 0.95 0.89 0.92 1.13

Industry Average of Indian Power Sector:


Year 2009 2008 2007 2006 2005

D/E Ratio 0.76 0.83 0.9 0.66 0.72

Current Ratio 1.66 1.58 1.48 1.62 1.56

FAT Ratio 0.49 0.55 0.59 0.43 0.41

Inventory Turnover Ratio 13.65 15.6 17.1 12.74 13.44

Interest Coverage Ratio 3.54 3.74 3.09 3.51 3.35

ROE (%) 9.21% 8.99% 9.45% 8.92% 9.12%

ROA 0.06 0.06 0.06 0.06 0.06

Quick Ratio 1.73 1.72 1.62 1.56 1.50

Tax Burden Ratio 0.84 0.79 0.84 0.86 0.87


Comparative Analysis (2009):

Company\Ratios GEL NTPC Power

Grid

Tata

Power

Reliance

Infra

Ind. Avg.

D/E Ratio 0.2 0.54 1.77 0.49 0.55 0.76

Current Ratio 2.05 2.72 0.69 1.82 1.76 1.66

FAT Ratio 1.09 0.73 0.17 0.94 1.63 0.49

Inventory Turnover

Ratio

137.8 14.19 24.09 13.03 26.55 13.65

Interest Coverage

Ratio

3.24 5.63 1.88 3.34 4.61 3.54

ROE (%) 7.03% 13.69% 11.39% 10.61% 10.24% 9.21%

ROA 0.04 0.08 0.07 0.07 0.05 0.062

Quick Ratio 3.89 2.66 0.77 1.95 1.54 1.73

Tax Burden Ratio 0.92 0.88 0.76 0.83 0.95 0.84



Balance Sheet of GMR Energy Ltd.:

Year Mar

09

Mar

08

Mar

07

Mar

06

Mar

05

SOURCES OF FUNDS :

Share Capital 247.5 247.5 247.5 247.5 247.5

Reserves Total 217.84 186.6 171.4

5

140.53 112.8

Equity Share Warrants 0 0 0 0 0

Equity Application Money 0 0 0 0 0

Total Shareholders Funds 465.34 434.1 418.9

5

388.03 360.3

Secured Loans 124.8 51.08 124.3

2

221.12 287.32

Unsecured Loans 0 0 1.02 16.02 15.92

Service Line & Sec.Dep. From Cust. 0 0 0 0 0

Total Debt 124.8 51.08 125.3

4

237.14 303.24

Total Liabilities 590.14 485.18 544.2

9

625.17 663.54

APPLICATION OF FUNDS :

Gross Block 946.93 945.53 944.1

8

942.22 939.34

Less: Accumulated Depreciation 735.06 670.69 594.7

2

522.6 452.15

Less:Impairment of Assets 0 0 0 0 0

Net Block 211.87 274.84 349.4

6

419.62 487.19

Lease Adjustment 0 0 0 0 0

Capital Work in Progress 0.88 0 0 0 0

Investments 123.42 226.85 65.83 103.12 57.23

Current Assets, Loans & Advances

Inventories 7.41 7.54 8.25 13.07 6.98

Sundry Debtors 89.65 92.44 82.67 74.87 53.69



Cash and Bank 226.48 6.07 156.7

7

123.92 119.32

Loans and Advances 15.79 19.12 11 6.68 7.83

Total Current Assets 339.33 125.17 258.6

9

218.54 187.82

Less: Current Liabilities and Provisions

Current Liabilities 85.27 141.62 129.5

8

109.81 62.52

Provisions 0.09 0.06 0.23 6.55 6.55

Total Current Liabilities 85.36 141.68 129.8

1

116.36 69.07

Net Current Assets 253.97 -16.51 128.8

8

102.18 118.75

Miscellaneous Expenses not written off 0 0 0.12 0.25 0.37

Deferred Tax Assets 0 0 0 0 0

Deferred Tax Liability 0 0 0 0 0

Net Deferred Tax 0 0 0 0 0

Total Assets 590.14 485.18 544.2

9

625.17 663.54

Contingent Liabilities 0 1.85 0.51 0.63 0.63

Profit and Loss Account:

Year Mar 09 Mar 08 Mar 07 Mar 06 Mar 05

INCOME :

Operating Income 1,030.05 765.56 566.89 475.83 391.83

Excise Duty 0 0 0 0 0

Net Operating Income 1,030.05 765.56 566.89 475.83 391.83

Other Income 25.54 25.82 14.36 9.49 7.64

Stock Adjustment 0 0 0 0 0

Total Income 1,055.59 791.38 581.25 485.32 399.47

EXPENDITURE :



Electricity & Fuel Expenses 0 0 0 284.77 202.61

Operating Expenses 0 0 0 34.44 27.45

Employee Cost 0 0 0 2.79 2.75

Selling & Administration expenses 0.9 1.49 1.48 21.11 20.21

Miscellaneous Expenses 939.14 689.06 455.18 15.74 5.6

Less : Pre-operative Expenses

Capitalised

0 0 0 0 0

Total Expenditure 940.04 690.55 456.66 358.85 258.62

Operating Profit 115.55 100.83 124.59 126.47 140.85

Interest 15.79 8.92 17.44 24.69 35.27

Gross Profit 99.76 91.91 107.15 101.78 105.58

Depreciation 64.37 76.15 72.4 71.49 73.4

Profit Before Tax 35.39 15.76 34.75 30.29 32.18

Tax 2.68 0.8 3.83 2.43 2.6

Fringe Benefit tax 0 0 0 0.13 0

Deferred Tax 0 0 0 0 -6.78

Reported Net Profit 32.71 14.96 30.92 27.73 36.36

Extraordinary Items 0 0 0 1.56 -2.09

Adjusted Net Profit 32.71 14.96 30.92 26.17 38.45

Adjustment below net profit 0 0 0 0 0

P & L Balance brought forward 152.91 137.95 107.03 79.3 48.06

Statutory Appropriations 0 0 0 0 0

Appropriations 0 0 0 0 5.12

P & L Balance brought forward 185.62 152.91 137.95 107.03 79.3

Dividend 0 0 0 0 0

Preference Dividend 0 0 0 0 0

Equity Dividend % 0 0 0 0 0

Earnings Per Share-Unit Curr 1.32 0.6 1.25 1.12 1.47

Earnings Per Share(Adj)-Unit Curr

Book Value-Unit Curr 18.8 17.54 16.93 15.68 14.56



Post Graduate Program

Fortnightly status report for Industry Internship Program

SI. No: 1 Date: 14/05/2010

Reg. No: 09PG110 Name of the Student: SHONE THATTIL

Submitted to: Dr. Rekha

Title of SIP: Financial Accounting and Analysis of GMR Energy Limited

Summary of work done till date:



The following work is going on under the guidance of industry guide and their subordinates:

Analyzing the financial statements of GMR Energy Netherlands Limited and their subsidiary company in Indonesia.

Also analyzing the performance of the holding company GMR Energy Limited (GEL).

Also got the information relating to the RBI guidelines and the policies that the company is following and right now I am going through it.

Work carried out during the fortnight under report:

a. Research Papers / Articles read / procured / downloaded:

Gone through their annual reports and their research papers on how their company’s operations relating to their foreign companies are going on.

b. Internet searching results, if any:

As of now, capitaline database for the balance sheets and profit and loss statements for the analysis of the performance of GMR Energy Limited.

c. Draft write up prepared, if any:

RBI guidelines and the policies that the company follows

Significant accounting standards that I have come across while analyzing the financial statements as of now i.e., relating to the Indonesian GAAP.

d. Problems encountered, if any:

The financial statements relating to the GMR Energy Netherlands Limited, as of now they cannot give it to me to put it in the report since they need to get the permission from their higher ups and it is of the year 2009 and the annual report is not yet disclosed publically.

They changed me from infrastructure sector to their energy sector this week because of that I had to start again from the beginning i.e., the performance analysis of the company in energy sector.



e. Proposed steps during the next fortnight:

Financial statement analysis of GMR Energy Mauritius Limited.

Transactions and fund flow from the parent company in India to their foreign company.

f. Any other relevant information:

I would like to know if any other details need to be collected that could help me in preparing the report. And also if any changes are required in the way that I am writing up the fortnightly reports, please do tell.

SHO

NE THATTIL

Date: 14/05/2010 (Signature of the student)



SI. No: 2 Date: 23/05/2010



Title of SIP: Financial Performance and Analysis of GMR Energy Limited





Transactions and funding between the holding company GMR Energy Ltd and GMR Energy Mauritius Ltd.

The role RBI in such kind of transactions between an Indian and a foreign company.

And also continuing with the performance analysis of the holding company GEL.



Gone through their book of records on company’s operations relating to how the transactions and funding took place between the Indian and the foreign company.


As of now, capitaline database for the balance sheets and profit and loss statements for the analysis of the performance of GMR Energy Limited.

c. Problems encountered, if any:

I am finding it difficult to find any proper internet sites and books that could help me in familiarizing with the Indonesian and Canadian GAAP which could help me out in this project.

d. Proposed steps during the next fortnight:

Looking into the operations of how the company acquired a 50% stake in Homeland Mining & Energy South Africa.

And also how the valuation is done about acquiring the company.



e. Any other relevant information:

I would like to know if any other details need to be collected that could help me in preparing the report and also if any changes are required.

SHO

NE THATTIL




SI. No: 3 Date: 23/05/2010








Looked into the operations of how GMR Energy Ltd acquired 50% of the stake in Homeland Mining & Energy SA (PTY) LTD.

Also into accounting in general mining industry.

The valuation analysis of Homeland Mining & Energy SA (HMESA)



Gone through their book of records on company’s operations relating to how the transactions took place between the Indian and the foreign company while acquiring 50% of its stake by purchasing the equity shares of HMSEA.

Also looked into the accounting principles followed by the company in the mining industry.


http://www.indiaenergyportal.org/overview_detail.php http://www.planningcommission.nic.in http://www.powermin.nic.in


About how the accounting is done in the mining industry.

Details about HMESA and also on their corporate structure.

Brief details about all the subsidiaries of GMR Energy Ltd.




Looking into the financial statements of GMR Energy Cyprus Ltd.

Also on how the RBI is intimidated about the transactions between the Indian and foreign company.



SHO

NE THATTIL




SI. No: 4 Date: 11/06/2010








Financial statement analysis of GMR Energy Cyprus Limited and the accounting policies adopted in the preparation of financial statement.

Financial statement analysis of PT Unsoco Jakarta, Indonesia.

Also looked into how the RBI is intimidated about the transactions between the Indian and foreign company.

Also looked into the operations of the company when they are going for an IPO.



Looked into their records of how the company has taken steps before going for an IPO.

Also looked into the annual report of NTPC Ltd

Also looked into the reports based on both the companies- PT Unsoco and GMR Energy Cyprus Ltd.




http://www.energysectornews.com http://www.in.kpmg.com http://www.crisil.com http://www.indiapower.org


Risk factors associated with the business of the company.


Continuing with the operations that were taken during IPO including the bidding process and also the regulations and policies in the power sector.



SHO

NE THATTIL


REFERENCES:

DATABASE:

Capitaline Plus Central Electricity Authority of India Ministry of Power

Search Engines:



Google.com Askjeeves.com

Websites:

http://www.gmrgroup.in/

http://www.indiaenergyportal.org/overview_detail.php

http://www.energysectornews.com/Indian-Power-Sector-Analysis-Reports/IM114.htm

http://www.in.kpmg.com/TL_Files/Pictures/PowerSector_2010.pdf

http://www.powermin.nic.in/

http://www.indiapower.org/

http://www.teriin.org/opet/articles/art2.htm

http://planningcommission.nic.in/reports/genrep/rep_intengy.pdf

http://www.cea.nic.in/about_us/Annual%20Report/2007-08/annual_report_07_08.pdf

http://www.eia.doe.gov/

http://www.iea.org/textbase/nppdf/free/2009/key_stats_2009.pdf

http://business.rediff.com/column/2009/jun/01/guest-power-reform-indias-problem.htm

http://www.worldenergy.org

http://www.equitymaster.com/research-it/sector-info/power/


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