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FINANCIAL MANAGEMENT IN POWER PROJECTS OF KARNATAKA:

A Case Study of KARNATAKA POWER CORPORATION LTD (KPCL)

Dr. TANAJI G. RATHOD, M.Com, MBA-Finance, PhD.,

Manager (Finance & Accounts)KSIIDC, Bangalore

Email : tanajirathod@gmail.com

Dr R Hiremani Naik, M.Com, PhD.,Reader & Chairman , MBA Dept, Institute of Management Studies, Kuvempu University, SHIMOGA

FRAMEWORK FOR ANALYSIS

2

Overview of Power Sector,

Objectives,

Analysis of Case Study,

Summary of Findings and

Suggestions.

3

RESEARCH OBJECTIVES

1. To Review the Power Generation Sector In Karnataka,

2. To analyze existing Financial Management in KPCL,

3. To Identify the Hurdles in Operational & Financial Performance of

KPCL,

4. To Assess the efficiency of Financing & Investment Decisions in KPCL,

5. To Suggest the Ways and Means for improving the Operational and

Financial performance of KPCL.

RESEARCH GAP

4

• The previous research study revealed that most of the power generation utilities in India are not practicing prudent Financing and Investment Decisions in convergent with Global Standards [IFRS, GAAPs, ECBs, Derivatives, Access to Capital Market and New Technology etc.,]

• No Such Study has been conducted in Karnataka on Financing and Investment Decisions of Power Generation Projects.

• Therefore the present study entitled “ANALYSIS OF FINANCING AND INVESTMENT PRACTICES IN KPCL” is undertaken.

RESEARCH FRAMEWORK

Annual Reports

5

KPCLInterview Questionnaire

Inter-Firm Comparisons

6

RESEARCH METHODOLOGY PRIMARY DATA Structured Questionnaire (19)

Field Study at Power Plants in Karnataka

Interviews with Senior Officers of KPCL

Interview with Industry Experts

SECONDARY DATA Annual Reports of KPCL

( for 5 FY 2002-2007)

Inter-Firm Comparison Study (5)

PhD Thesis (14) Reports and Proceedings of KERC,

CERC,CEA, KPTCL, ESCOMs, MoP, GoI, Energy Dept of GoK, CMIE, (49)

Journals & Magazines (36)

Official websites (14),

Books (72),

Newspaper clippings (23).

TOOLS FOR STATISTICAL ANALYSIS

Operational Parameters of Power Plants Annual Reports for Five Years(2002-2007)

Balance Sheets, Profit & Loss Accounts, Cash Flow Statements,

Financial Ratios on, Liquidity, Leverage, Profitability & EVA

Time Series Analysis Trend Analysis Results of Questionnaire Field Survey & Interview with industry experts

7

8

G D C

G

G T D C

G D C

G D C

G

G

D

T D

C

C

BUSINESS MODELS IN POWER SECTOR

Generator Wholesaler/ Distri.Co/ Customer Aggregator Retailer

T

Model - 4

Model - 1

Model - 2

Model - 3

9

Ownership Model -1 Model -2 Model -3 Model -4

Government Ownership

India

NZ

Public Corporation

UK

NZ

Private Corporation

USA

1978 1992

1990-98

INDUSTRY STRUCTURE – MOVEMENT IN OWNERSHIP MATRIX

1991

1994

INSTALLED CAPACITY & GENERATION

As on 31.3.2009

REGION MW MU

INDIA 1,47,965 7,17,657

KARNATAKA 9,346 45,000

KPCL 5,509 25,080

Source: CEA Annual Report- FY 2006-07 10

59% KPCL Share 59% KPCL Share 56% KPCL Share 56% KPCL Share

INSTALLED CAPACITY OF KARNATAKA ( As on 31.03.2009) (IN MW)

SECTOR TYPE

HYDRO

THERMAL

NUCLR

RES TOTAL

%age

State 3518 2098 0 452 6068 65.14

Private 0 586 0 1428 2014 21.55

Central 0 1073 191 0 1264 13.52

Total - 3518 3757 191 1880 9346 100.00

%age 37.64 40.20 2.04 20.12

100.00

Source: Annual Reports of KPCL, KERC,CEA

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5509 MW of KPCL @ 59%

12

*Bidadi Power Project is yet to take-off

PEAK DEMAND & SUPPLY GAP OF KARNATAKA

F Y PEAK DEMAND

(MW)

PEAK MET(MW)

DEFICIT(MW) (-)

%AGE

2001-02 5587 5168 -419 -8

2002-03 5628 5219 -409 -7

2003-04 6213 5445 -768 -12

2004-05 5927 5612 -315 -5

2005-06 5949 5558 -391 -7

2006-07 6253 5811 -442 -7

2007-08 6583 5567 -1016 -15

2008-09 6877 6548 -329 -5Source: Load Dispatch Canter of

Karnataka/www.cea.org

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ENERGY DEMAND & SUPPLY OF KARNATAKA

F Y ENERGY DEMAND (MU)

ENERGY MET(MU)

DEFICIT(MU) (-)

%AGE

2001-02 34385 28863 -5522 -16

2002-03 35129 29365 -5764 -16

2003-04 36153 31145 -5008 -14

2004-05 35156 33687 -1469 -4

2005-06 34601 34349 -252 -1

2006-07 40797 39948 -849 -2

2007-08 40371 39282 -1089 -3

2008-09 43291 40700 -2591 -6

Source: www.cea.org14

PEAK & ENERGY SUPPLY OF KARNATAKA

MW

0

4000

8000

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

PEAK

MET

KWH

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

YEARS K

WH

DEMAND

SUPPLY

15

OPERATIONAL PERFORMANCE OF KPCL

PARAMETERS 2002-03 2003-04 2004-05 2005-06 2006-07

Installed Capacity (MW) 4350 4351 4641 4641 4995

Electricity Gen (MU) 17138 18426 18993 19889 26635

(Thermal) 10292 11393 10730 9165 11483

(Hydel + Wind) 6835 7033 8260 10724 15152

Thermal Aux.Consump (%) 8.47 8.50 8.68 8.63 8.22

Plant Load Factor (%) 90.39 88.23 83.33 71.17 89.17

Ash Utilized (%) 35 35 60 65 80

Hydro. Aux..Consump (%) 1.28 1.68 1.54 1.56 1.62

Hydro. PLF(%) 85.80 90.05 94.79 95.60 94.43

Man / MW Ratio 1.62:1 1.59:1 1.39:1 1.39:1 1.35:1

Total Employees 7057 6961 6453 6437 6737

Source: Annual Reports of KPCL FY 2002-07

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FINANCIAL PERFORMANCE ( BALANCE SHEETS) OF KPCL

PARTICULARS 2002-03 2003-04

2004-05 2005-06 2006-07

SOURCE OF FUNDS - (a)

4823.47 5429.80 6300.93 7255.39 7980.87

Paid-Up Capital 662.98 662.98 662.98 662.98 662.98

Reserves & Surplus 1315.22 1375.48 1599.81 1836.27 2262.37

Total Loan Funds 2845.27 3391.34 4038.14 4756.14 5055.52

APPLICATION OF FUNDS - (b)

4823.47 5429.80 6300.93 7255.39 7980.87

Gross Fixed Assets 4804.23 5488.93 5826.97 6053.60 6507.56

Less: Depreciation -1857.98 -2144.61 -2410.46 -2668.92 -3166.29

Net Fixed Assets 2946.25 3344.31 3416.51 3384.68 3338.49

Capital W-I-P 688.85 433.50 629.70 1098.88 2151.50

Total Fixed Assets 3635.10 3777.81 4046.21 4483.56 5489.99

Inventories 193.90 159.63 207.45 270.06 240.28

Sundry Debtors 1050.87 1557.38 2104.64 2534.24 2596.12

Cash & Bank balances 203.35 91.88 105.40 90.13 248.68

Less: Current Liab & Prov. -521.21 -444.69 -536.97 -373.97 -909.20

Net Current Assets 1146.07 1616.32 2199.01 2739.00 2472.70

Rs. in Cr.

OPERATING PERFORMANCE (P&L A/C) OF KPCL (Rs. In Cr)

PARTICULARS FY 2002-03 2003-04 2004-05 2005-06 2006-07

Sale of Energy 2094.25 2438.22 2483.18 2520.67 3433.82

Other Income 69.79 58.46 133.86 148.89 316.55

TOTAL TURNOVER 2164.04 2496.68 2617.04 2669.56 3750.37

Fuel & Chemical Expenses

1090.26 1260.16 1415.32 1334.32 1789.75

Administrative Expenses

353.28 397.12 373.74 335.70 905.49

Financial Charges 226.77 273.48 246.20 349.65 383.28

Depreciation 213.26 260.80 267.41 265.55 244.66

Misc. Expenses 32.55 35.92 46.81 39.78 56.13

TOTAL EXPENDITURE 1916.12 2227.48 2349.59 2325.00 3379.31

Profit After Tax (PAT) 240.69 223.23 239.46 251.58 322.32

Transferred to Reserves

232.08 214.29 224.50 236.46 304.93

Dividend Paid 14.95 14.95 14.95 15.12 17.39

Total PAT : 240.69 223.23 239.46 251.58 322.32

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CASH FLOW STATEMENTS OF KPCL

( Rs. In. Cr.)

PARTICULARS 2002-03 2003-04 2004-05 2005-06 2006-07

Operating Profit before Working Capital Changes

623.78 753.35 662.16 947.12 1003.55

Operating Profit After Working Capital Changes

825.46 171.61 93.03 403.61 1443.20

Net Cash Flow from Operating Activities = (A)

564.81 -156.16 -215.92 376.59 1344.04

Net Cash Flow from Investment Activities = (B)

-190.55 -338.81 -401.35 -690.00 -1063.06

Net Cash Flow from Financing Activities = ( C )

-440.73 383.50 630.83 298.12 -127.99

Net Changes in Cash and Cash Equivalents = (A+B+C)

-66.47 -111.47 13.56 -15.29 152.99

Closing Cash and Cash Equivalents 179.71 91.88 105.43 95.67 248.6819

FINANCIAL RATIOS OF KPCL

PARTICULARS 2002-03

2003-04

2004-05

2005-06

2006-07

LIQUIDITY RATIO

Current Ratio 3.19 4.63 5.09 8.32 3.72

Acid-test Ratio 2.82 4.27 4.71 7.60 3.46

Working Capital Turnover Ratio

0.28 0.33 0.39 0.45 0.43

LEVERAGE RATIO

Debt-Equity Ratio 1.44 1.43 1.72 1.82 1.66

Debt assets Ratio 0.81 0.83 0.85 0.87 0.88

Interest Coverage Ratio 2.09 1.98 2.08 1.99 1.97

Debt Service Coverage Ratio 1.03 2.44 2.61 2.19 2.20

TURNOVER RATIO

Inventory Turnover Ratio 5.76 7.13 7.71 5.59 7.01

Debtors Turnover Ratio 1.99 1.57 1.35 0.99 1.32

Average Collection Period (Days)

183 233 309 367 276

Fixed Assets Turnover Ratio 0.81 0.53 0.49 0.49 0.68

Total Assets Turnover Ratio 0.28 0.32 0.29 0.25 0.31

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FINANCIAL RATIOS OF KPCL

PARTICULARS 2002-03 2003-04 2004-05 2005-06 2006-07

PROFITABILITY RATIO

Gross Profit Margin Ratio (%)

51.27 50.71 48.39 52.97 57.10

Net Profit Margin Ratio (%) 22.67 22.26 20.69 27.54 21.97

Admin & Other Exp Ratio (%) 16.85 16.27 15.04 13.31 26.36

Financial Charges Ratio (%) 10.83 11.22 9.91 13.87 11.16

Return On Assets (%) 3.25 2.96 2.79 2.53 2.87

Earning Power (%) 4.99 4.11 3.80 3.47 4.04

Return on Capital Employed (%)

12.17 10.95 10.58 10.07 11.02

Dividend (%) 2 2 2 2 2.24

Dividend Payout Ratio (%) 5.51 5.95 5.54 5.27 4.61

Earning Per Share (EPS) Rs. 363.04 336.71 361.19 379.47 486.17

Face Value of Share (Rs.) 1000 1000 1000 1000 1000

Dividend Per Share (Rs.) 20 20 20 20 22.42

Book Value Per Share (Rs.) 2983.79 3074.69 3413.05 3769.71 4412.42

Economic Value Added (Rs.) -91.65 -177.65 -121.99 -255.87 -255.9821

INTER-FIRM COMPARISON STUDY OF BALANCE SHEETS AS ON 31.3.2005

(Rs. in Cr)

PARTICULARS KPCL APGENCO

NTPC NHPC REL TATA POWER

Source of Funds 2262.79

2106.80 42113.70

13797.10

6339.89 5136.47

Loan funds 3889.51

9952.86 17087.80

7021.80 3738.67 2860.01

TOTAL : ( A) 6300.93

12059.66

59201.60

22194.71

10361.22

8007.80

Fixed Assets 4046.21

9502.27 3224.30 18364.52

2912.31 3246.66

Net Current Assets

2199.00

1288.63 6160.60 59.58 6752.69 1235.51

TOTAL : (B) 6300.93

12059.66

59201.60

22194.71

10361.22

8007.80

Installed Capacity (MW)

4640 6555 23435 2449 941 2203

Generation (MU) 18993 28720 158271 111286 5977 13283

Source: Annual Reports of Co. for - FY 2004-05

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INTER-FIRM COMPARISON STUDY OF PROFIT & LOSS ACCOUNTS AS ON 31.3.2005

(Rs. in Cr)

PARTICULARS KPCL APGEN

CO

NTPC NHPC REL TATA POWER

Total Income 2617.04

4293.01

25546.00

1845.94

4592.55

4317.57

Total Expenditure 2349.59

4207.42

19478.00

1068.41

4022.91

3558.78

Profit After Tax (PAT)

239.46 51.63 5807.00 684.58 520.14 551.36

Dividend Paid 14.96 0 2247.00 159.21 99.10 169.90

Transferred to Reserves

224.50 0 3537.30 159.21 425.32 150.00

Transferred to B/S 0 51.63 81.20 2369.02

200.31 235.19

TOTAL PAT 239.46 51.63 5865.50 2528.23

625.63 555.09

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COST PER UNIT OF INTER-FIRMS

PARTICULARS KPCL APGEN

CO

NTPC NHPC REL TATA POWER

Sales per KWh (Rs.Ps) 1.38 1.49 1.61 1.64 7.68 3.25

Cost of Generation (Rs.Ps)

1.24 1.46 1.23 0.95 6.73 2.68

Margin of profit (Ps.) 0.14 0.03 0.38 0.69 0.95 0.57

Man/MW Ratio 1.39:1

1.68:1 0.91:1

5.50:1

1.17:1

1.36:1

PRICE PER UNITS OF KPCL

2002-03

2003-04

2004-05

2005-06

2006-07

Gross Sale per KWh ( Rs.ps)

1.26 1.35 1.38 1.34 1.41

Cost of Generation (Rs.Ps)

1.12 1.21 1.24 1.17 1.27

Gross margin (Ps.) 0.14 0.15 0.14 0.17 0.14

Source: Annual Reports24

PRICE MOVEMENT IN INTER-FIRMS

0

100

200

300

400

500

600

700

800

900

KPCL

APGENCO

NTPC

NHPCREL

TATAPOWER

PA

ISE

PE

R U

NIT

SP

CP

PM

FY 2004-05

FINANCIAL RATIO OF INTER-FIRMS

PARTICULARS KPCL APGEN

CO

NTPC NHPC REL TATA POWE

R

Debt Equity Ratio 1.72:1 4.72:1 0.41:1 0.51:1 0.65:1

0.63:1

Face Value Per Share (Rs) 1000 100 10 1000 10 10

Book Value Per Share (Rs)

3413 100 51 1464 342 260

Earning Per Share (Rs.) 361.19 2.42 7.04 72.57 28.02 27.84

R O C E (%) 3.80 -1.69 9.91 11.39 6.04 6.93

Return On Equity (%) 10.58 2.42 13.90 4.96 8.20 10.73

Dividend Per Share (Rs) 20.00 0 2.40 14.85 4.69 7.48

Dividend Payout Ratio(%) 5.54 0 34.08 20.47 16.73 26.86

Performance Ratings V VI II IV III I

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For FY 2004-05

RESPONDENTS FOR QUESTIONNAIRE

Source: Questionnaire based Survey and Findings

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TECHNICAL No. NON-TECHNICAL No. TOTAL

Director – TechnicalExecutive Directors Chief Engineers Superintendents Engineers Executive Engineers Assistant Executive Engineers Assistant EngineersJunior Engineers

1138

25202314

Director – HR / Finance Executive DirectorsGeneral Managers Deputy General Managers Assistant General Managers Accounts Officers Assistant Accounts Officers Junior Officers (HR, A/cs, Adm.)

1138

20362511

226

1645564825

TOTAL : 95 TOTAL : 105 200

Sample Size : 9%Response Rate : 100%

Total Officers – 2301Total Workers – 3936 6237

SUMMERY OF FINDINGS - i

I. OPERATIONAL ASPECTS; Moderate Utilization of Thermal Power Plants (PLF)

Use of Un-washed coal (not imported coal)

R,M & U Programm not in all old Plants(15 to 20 Years Old)

Not implemented IT Tools at all Power Plants and Site offices

Only Demo Wind Mills and manage O & M effectively

To put up at least 500 MW Power Plants annually to meet demand

( Appx Rs.2000 Cr need of funds)

Fixed Assets to be utilized more productively

To dispose-off old scraps

To increase productivity of HR

To be focused on R & D

Continued…

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SUMMERY OF FINDINGS - ii

II. ON FINANCIAL ASPECTS; It is depended upon Govt. for Equity Funds and for other supports

More focus to initiate Swapping of Debt Funds with Low cost

To maintain Debenture Redemption Reserves ( u/s 117C of Co. Act)

More Capital W-I-P in existence

Lack of concentration to utilize Current assets (Inventories) effectively

Huge amount of Sundry Debtors (ESCOMs/KPTCL)

Longer Average Collection Period (276-367 days)

To Implement a Separate Cost Control Programme

Continued…

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SUMMERY OF FINDINGS - iii

II. ON FINANCIAL ASPECTS: To rationalize the Tariff Structure (PPAs)

There is no financial constraints for day to day operations

Loans and Advances are at comfortable level

Current Liabilities and Provisions are met in time

Try to diversify business activities

To enter into power trading activities

Huge cost of consumption of Coal and Fuel

Try to reduce Administrative and other Expenditures (KERC directives)

To try to control financial charges ( Swapping, Fin Engg, W/C Mgt etc., )

To Clarify the Depreciation ( EA 2003, ESA 1948, IT Act 1961,Co. Act, 1956)

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SUGGESTIONS - i

I. OPERATIOANAL ASPECTS: To implement R,M and U Programme for Optimum level operation

To implement SCADA System and other IT initiatives

To maintain cleaning systems (at Boiler, Turbines, Generators) Coal

To reduce Capital W-I-P

To maintain Current Assets (Inventories) at optimum level

To utilize Fixed Assets effectively (Optimize PLF)

To put control on current Assets

To Focus on Corporate Social Responsibility Activities

To Focus on Research & Development activities

To Focus on modern systems and technologies

Continued… 31

SUGGESTIONS - ii

II. FINANCIAL ASPECTS: To enter into Capital Market (IPO) To reduce Sundry Debtors To put focus on cost control system on RTPS To enter into direct selling to bulk customers through Open Access To upgrade Tariff Structure of PPA To equalize level playing field with IPPs To maintain Escrow Accounts with ESCOMs for realization of dues To outsource non-core activities at plant level To implement Availability Based Tariff (ABT) mechanism To control Cost of Consumption of Fuel and Coal

Continued….32

SUGGESTIONS - iii

II. FINANCIAL ASPECTS: To put periodical study on financial management To put efforts to increase ROCE, EVA, Balance Scorecard etc. To increase Dividend Pay out ratio To maintain Debt equity ratio, Current Ratio and DSCR To put Benchmark with other best managed companies like TATA Power and

Reliance Energy and NTPC. Try to bring down Financial Charges To increase expenses on Preventive measures for Environmental Protection, Global

Warming etc.

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RESEARCH PAPERS PUBLISHED

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“Financing and Investment Decisions in Power Projects of Karnataka – A Case study of KPCL”, Renewable Energy and Environment for Sustainable Development, a proceedings of an International Conference on “Renewable Energy Asia -2008” held at IIT Delhi, Pp.239-244.

“Impact of Availability Based Electricity Tariffs (ABT) on the Power Sector - Case Study of Karnataka” in The ICFAI University Journal of Infrastructure, The ICFAI University Press, Hyderabad, Volume No.VI, No.3, September 2008, Pp.51-64.

 “Power Sector in Karnataka - A Review of Reforms Status and Impact of the Electricity Act 2003” PARLIAMENTARY

AFFAIRS, monthly journal published by Institute of Parliamentary Affairs, Bangalore, Volume 25, Issue 12, December 2005, Pp 23-33.

“Power Sector in India – Heading towards Reforms” ICFAI Journal of Public Administration, ICFAI University Press, Hyderabad, Volume 2, Issue 1, January 2006. Pp 39-56.

“Wind Power Development In Karnataka – A Micro Study” SOUTHERN ECONOMIST, Bangalore, October 15, 2005, Volume 44, Issue No.12, Pp.13-15.

“International Financial Reporting Standards (IFRS)- Emerging Opportunities and Challenges for India”, CHARTERED ACCOUNTANT, New Delhi,, Volume 54, No.07, January 2006, Pp 988-992.

“A Peep into the Power Sector of India” GITAM JOURNAL OF MANAGEMENT, Visakhapatnam, Volume.4, No.2, July-December 2006, Pp.115-140.

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