1
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 : [email protected]
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
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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%
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*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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