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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
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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.
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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.
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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.
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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
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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%.
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Fig 1.2: world’s total consumption by region
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Electricity Generation by Fuel:
Fig 1.3: world’s electricity generation by fuel
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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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,
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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.
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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
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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
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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.
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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
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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'
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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)
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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)
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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
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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:
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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
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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.
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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
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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.
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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.
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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
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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.
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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.
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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
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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
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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.
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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:
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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.
Description of 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:
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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.
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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:
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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.
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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:
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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:
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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.
Accounting Treatment:
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.
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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
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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)
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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.
Description of Activities:
56. Activities conducted in environmental management include but are not limited to:
a) Preparing analysis of environmental impact documents;
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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.
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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.
Accounting Treatment:
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.
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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.
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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:
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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:
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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
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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.
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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.
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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.
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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.
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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
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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
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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.
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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.
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• 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
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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.
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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".
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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.
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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
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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
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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.
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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
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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
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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
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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
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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.
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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.
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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
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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
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Financial Performance and Analysis GMR Energy Limited
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
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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
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Financial Performance and Analysis GMR Energy Limited
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.
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Financial Performance and Analysis GMR Energy Limited
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
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Financial Performance and Analysis GMR Energy Limited
GMR has the lowest ratio. This shows that they can improve their performance by proper
utilization of debt and equity component.
Current Ratio:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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Financial Performance and Analysis GMR Energy Limited
Fixed Asset Turnover Ratio:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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Inventory Turnover Ratio:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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Interest Coverage Ratio:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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Financial Performance and Analysis GMR Energy Limited
Return on Equity:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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Return on Assets:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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Financial Performance and Analysis GMR Energy Limited
Quick Ratio:
GMR NTPC Power Grid Tata Power Reliance Infra Ind Avg0
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.
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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
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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.
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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.
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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.
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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.
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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:
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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
Financial Performance and Analysis GMR Energy Limited
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
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Financial Performance and Analysis GMR Energy Limited
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
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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 :
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Financial Performance and Analysis GMR Energy Limited
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
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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:
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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.
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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)
Post Graduate Program
Fortnightly status report for Industry Internship Program
SI. No: 2 Date: 23/05/2010
Reg. No: 09PG110 Name of the Student: SHONE THATTIL
Submitted to: Dr. Rekha
Title of SIP: Financial Performance and Analysis of GMR Energy Limited
Alliance Business School Page 132
Financial Performance and Analysis GMR Energy Limited
Summary of work done till date:
The following work is going on under the guidance of industry guide and their subordinates:
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.
Work carried out during the fortnight under report:
a. Research Papers / Articles read / procured / downloaded:
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.
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. 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.
Alliance Business School Page 133
Financial Performance and Analysis GMR Energy Limited
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
Date: 23/05/2010 (Signature of the student)
Post Graduate Program
Fortnightly status report for Industry Internship Program
SI. No: 3 Date: 23/05/2010
Reg. No: 09PG110 Name of the Student: SHONE THATTIL
Submitted to: Dr. Rekha
Alliance Business School Page 134
Financial Performance and Analysis GMR Energy Limited
Title of SIP: Financial Performance 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:
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)
Work carried out during the fortnight under report:
a. Research Papers / Articles read / procured / downloaded:
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.
b. Internet searching results, if any:
http://www.indiaenergyportal.org/overview_detail.php http://www.planningcommission.nic.in http://www.powermin.nic.in
c. Draft write up prepared, if any:
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.
Alliance Business School Page 135
Financial Performance and Analysis GMR Energy Limited
d. Proposed steps during the next fortnight:
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.
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
Date: 28/05/2010 (Signature of the student)
Post Graduate Program
Fortnightly status report for Industry Internship Program
SI. No: 4 Date: 11/06/2010
Reg. No: 09PG110 Name of the Student: SHONE THATTIL
Alliance Business School Page 136
Financial Performance and Analysis GMR Energy Limited
Submitted to: Dr. Rekha
Title of SIP: Financial Performance 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:
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.
Work carried out during the fortnight under report:
a. Research Papers / Articles read / procured / downloaded:
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.
b. Internet searching results, if any:
Alliance Business School Page 137
Financial Performance and Analysis GMR Energy Limited
http://www.energysectornews.com http://www.in.kpmg.com http://www.crisil.com http://www.indiapower.org
c. Draft write up prepared, if any:
Risk factors associated with the business of the company.
d. Proposed steps during the next fortnight:
Continuing with the operations that were taken during IPO including the bidding process and also the regulations and policies in the power sector.
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
Date: 11/06/2010 (Signature of the student)
REFERENCES:
DATABASE:
Capitaline Plus Central Electricity Authority of India Ministry of Power
Search Engines:
Alliance Business School Page 138
Financial Performance and Analysis GMR Energy Limited
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/
Alliance Business School Page 139