fitch02Losses.pdf

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www.fitchratings.com 2 February 2012

Utilities / India

Losses in Indian State Power UtilitiesFive States Affecting the Sector Negatively

Special Report

Key Rating Drivers

Weak Financial Profile: The financial profile of India‟s state power utilities (SPUs) – including

generation, transmission, distribution and trading companies owned by state governments –

remains weak with aggregate annual book losses reaching INR295bn in the financial year to 31

March 2010 (FY10), up from INR70bn in FY06.

Weak Discoms: The SPUs‟ book losses are concentrated (93%) at the level of distribution

companies (discoms). Generation/transmission/trading companies contributed only 7% of net

aggregate book losses in FY10.

Five States’ Substantial Losses: Discoms in five states – namely Tamil Nadu (TN), Uttar

Pradesh (UP), Madhya Pradesh (MP), Jammu and Kashmir (J&K) and Haryana – contributed

nearly INR220bn (80%) of net aggregate book losses in FY10.

Negative Gross Margins: Discoms in these five states had negative gross margins (average

selling price – average power purchase cost), without considering subsidy payments. However

discoms in the states of TN, UP and J&K had negative gross margins even after considering

subsidy payments, reflecting the low average selling price per unit.

Consumer Mix, Differential Pricing: Discoms in the five states with high book losses have

been affected by an unfavourable combination of consumer mix and pricing.

High ATC Losses: The national average for aggregate technical and commercial (ATC) losses

remained high in FY10 at 27.15%. However, discoms in the states of J&K, MP and UP posted

ATC losses of 70%, 44% and 41% in FY10, which adversely affected their average selling

prices per unit.

Low Realisation of Subsidy: Discoms in the states of Rajasthan and Andhra Pradesh (AP)

recorded large cash losses in FY10 despite book profits of nil and INR65bn, respectively. The

cash losses were a result of low realisation of subsidy as discoms in these two states realised

only 7% and 45%, respectively, of the subsidy booked in FY10.

Higher Average Cost Price: The average power purchase cost per unit for discoms in the

states of Rajasthan, Haryana, TN and UP was much higher than NTPC Limited‟s („Fitch AAA(ind)‟/Stable) average selling price in FY10. This reflects the lack of sufficient long-term

power tie-ups by these discoms and their high reliance on short-term power, which is

expensive compared to long-term power.

Rating Implications

Impact on Discoms: A curtailment of fresh loans by banks and financial institutions to discoms

could trigger defaults by discoms, leading to rating downgrades.

Impact on Suppliers: Delayed payments by discoms can have a cascading effect on the value

chain, with delayed payments to generators leading to delayed payments to coal suppliers and

equipment suppliers, stretching their working-capital cycles and affecting their leverage profiles.

Related Research

India Power Sector Capex (December 2011)

State Power Utilities and States' FiscalConsolidation (November 2011)

India Power Traders: Risks OutweighRewards (October 2011)

Other Outlookwww.fitchratings.com/outlooks

Analysts

Salil Garg

+91 11 4356 [email protected]

Vivek Jain+91 11 4356 [email protected]

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Losses in Indian State Power UtilitiesFebruary 2012

2

Financial Health of SPUs

Financial Profile of All Utilities

The financial profile of SPUs worsened as their net aggregate annual book losses reached

INR295bn in FY10 from INR130bn in FY07. The net aggregate annual cash loss of SPUs

increased to INR288bn in FY10 from INR19bn in FY07. The increase in cash losses is more

worrisome.

Figure 1

131 125

248295

19 34

256288

0

100

200

300

400

FY07 FY08 FY09 FY10

Book loss Cash loss

Net Aggregate Losses of All State Power Utilities

(INRbn)

Source: Fitch, PFC; Cash Loss = PAT+ Depreciation+ Miscellaneous expenses written off+ Deferred Tax- Subsidy

booked+ Subsidy received

Losses Concentrated in Discoms

Of the aggregate book losses reported by all SPUs in FY10, 93% were at the discom level,

while the book losses of generating, transmission and trading (GTT) companies were only 7%.

The weak financial profile of discoms is the primary cause of stress for SPUs. This means that

under the ”cost-plus” tariff, generation and transmission companies are able to push their costs

to the discoms, which are unable to recover the same from their consumers. GTT utilities were

profitable in FY07 and FY08, but made losses in FY09 and FY10.

Figure 2

-50

0

50

100

150

FY07 FY08 FY09 FY10

At discom level At genco/transco/trading companies level

Distribution of Book Loss

(%)

Source: Fitch, PFC In Year FY07 and FY08 GTT companies had net-aggregate profits

Financial Profiles of Discoms

The financial health of discoms has deteriorated over the years, with the aggregate book loss

of discoms selling directly to consumers doubling to INR274bn in FY10 from INR143bn in FY07.

The cash loss over the same period increased by more than 4x to INR348bn from INR82bn.

While the substantial increase in the book and cash losses of discoms is widely known, Fitch

Ratings notes that a macro view of the financial profile of discoms masks the presence of the

healthy and well-performing discoms.

Related Criteria

Corporate Rating Methodology (August 2011)

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Figure 3

143 148

226

275

83111

294

348

0

100

200

300

400

FY07 FY08 FY09 FY10

Book loss Cash loss

Losses of Discoms Selling Directly to Consumers

(INRbn)

Source: PFC, Fitch

Classifying State Discoms: States can be classified according to the book profits/losses of

their discoms over FY08-FY10:

Quadrant I: States with discoms that have increased book profit.

Quadrant II: States with discoms that have decreased book profit.

Quadrant III: States with discoms that have decreased book loss.

Quadrant IV: States with discoms that have increased book loss.

Figure 4 State Discoms’ Book Profits/Losses

Decreasing Increasing

P r o f i t s

-20

-15

-10

-5

0

5

10

FY08 FY09 FY10

Quadrant-II

(INRbn)

Source: PFC

0

1

2

3

FY08 FY09 FY10

Quadrant-I

(INRbn)

Source: PFC

L o s s e s

-35

-30

-25

-20

-15

FY08 FY09 FY10

Quadrant-III

(INRbn)

Source: PFC

-265

-245

-225

-205

-185

-165

-145

-125

FY08 FY09 FY10

Quadrant-IV

(INRbn)

Source: PFC

Source: Fitch

There are 12 states in which the losses of discoms increased in FY10 versus FY08, and nine

states in which profits decreased (Annex 1, page 12). The states in Quadrant II and Quadrant

IV (a total of 21 states) are the cause of the high net-aggregate book loss (Annex 1).


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Discoms with Substantial Losses

However, of the discoms in 21 states present in Quadrant II and Quadrant IV, eight states had

discoms with book losses greater than INR10bn in FY10. Of these eight states, discoms in five

states – TN, UP, MP, J&K and Haryana – contributed 80% of the net aggregate book loss in

FY10. Discoms in three states – TN, UP and MP – recorded the largest book losses over

FY08-FY10 and constituted 66% of the net aggregate book loss in FY10.

Figure 5 Book Losses Over FY08-FY10 for Discoms in States with Highest BookLosses in FY10

Rank NameBook loss

in FY10

Net aggregatebook loss

in FY10 (%)Book loss

in FY09


in FY09 (%)Book loss

in FY08


in FY08 (%)

1 TN 97 35 78 35 35 242 UP 53 19 44 19 41 283 MP 33 12 25 11 18 124 JK 21 8 13 6 14 105 Haryana 15 6 15 7 8 5Total 220 80 175 77 116 79

Source: PFC, Fitch

Cross-Subsidy

Most of the discoms in India follow a differential tariff structure wherein industrial consumers

cross-subsidize agricultural consumers. This results in the average price of electricity being

higher for industrial consumers than agricultural consumers. Cross-subsidy in principle should

not result in a loss of revenue as the deficit created by sale of power to agricultural consumers

at lower rates should be compensated by the surplus generated by selling power to industrial

consumers at higher rates. However, some discoms have kept the price of power to agricultural

consumers so low that even cross-subsidising through industrial consumers does not help. This

leads to explicit subsidy support to the discoms by the governments of the respective states.

Cash Losses

Discoms in five states – TN, UP, MP, AP and Rajasthan – contributed 86% of the FY10 net

aggregate cash loss, with Rajasthan recording the highest cash loss of INR105bn. Discoms in

the states of Rajasthan, TN and UP were consistently in the top five states for cash-loss-

making discoms over FY08-FY10.

Figure 6 Cash Losses Over FY08-FY10 for Discoms in States with Highest CashLosses in FY10

Rank Name

Cashloss in

FY10

Net aggregatecash loss

in FY10 (%)

Cashloss in

FY09


in FY09 (%)

Cashloss in

FY08


in FY08 (%)

1 Rajasthan 105 30 64 22 21 192 TN 89 25 73 25 28 253 UP 48 14 39 13 35 324 MP 30 9 22 8 15 145 AP 28 8 52 18 -2.9 -3

300 86 250 85 96 87

Source: PFC, Fitch

Based on book and cash losses in FY10, discoms in the states of TN, UP, MP, JK, Haryana,

Rajasthan and AP emerge as the largest loss-making entities. Fitch has analysed the

underlying reasons for high book and cash losses.

Average Revenue and Cost per Unit

The performance of a discom can be better understood by studying the drivers of gross

margins, including subsidy. Gross margin is driven by average selling price per unit (a proxy for

revenues) and average cost per unit (a proxy for costs).


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The average selling price per unit of a discom is dependent on four key variables: differential

pricing, consumer mix, ATC loss and subsidy payments per unit. The average cost per unit is

dependent on two variables: average long-term power purchase cost and percentage of short-

term power purchase. The performance of a discom can be affected by one or a combination of

the factors mentioned above.

Figure 7

Analytical Framework

Source: Fitch

Gross Margin(Including Subsidy)

Average Selling PriceIncluding Subsidy

Average Cost ofPower Purchase

Average Selling PriceExcluding Subsidy

Subsidy% Short-Term Power

Purchased

Differential Pricing Amount

AgriculturalConsumers

Timeliness

Industrial Consumers

Domestic and Non-Domestic Consumer

Consumer Mix

ATC Loss

AgriculturalConsumers

Industrial Consumers

Domestic and Non-Domestic Consumer

Gross Margins

Gross margin – defined as the difference between average revenue per unit and average cost

per unit – is an important variable governing the financial health of a discom.

Discoms in Rajasthan, AP and Haryana are profitable at the gross margin level. Discoms in MP,

UP, TN and JK have negative gross margins. Since the discoms in the latter four states

recorded losses of INR0.03, INR0.30, INR0.46 and INR1.66 per unit respectively at the gross

margin level post subsidy, additional volumes sold by these states will lead to increasing losses.

Discoms in AP and Haryana have positive gross margins but their gross margins are too small

to cover the other operating costs of these discoms, which leads to large book losses.


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Figure 8

-2.0

-1.5

-1.0

-0.5

0.00.5

1.0

1.5

Rajasthan AP Haryana MP UP TN JK

(INR per unit)

Source: Fitch, PFC; Gross Margin = average revenue per unit - average power purchase cost per unit, Revenue

excludes other income

Gross Margins Including Subsidy of Discoms in FY10

Average Selling Price per Unit Excluding Subsidy

The average selling prices per unit excluding subsidy for discoms in TN, MP, AP and UP were

within a range of INR2.33 to INR2.44 in FY10. (JK is the exception.) While the average selling

price per unit ex-subsidy is in a narrow band in the four states mentioned above, the reasons

can depend on pricing, consumer mix and ATC losses.

Figure 9

0

1

2

3

Haryana TN MP AP UP Rajasthan JK

(INR per unit)

Source: Fitch, PFC; Average selling price = income from sale of power/ net input energy

Average Selling Price per Unit of Discoms Excluding Subsidy in FY10

Differential Pricing and Consumer Mix

Though the two variables can be considered as separate drivers of average selling price per

unit, it would be more prudent to discuss the effect of the two variables together. In India, the

prices paid by various categories of consumer – domestic and non-domestic, agricultural and

industrial – are different. Agricultural consumers pay the lowest price for electricity whereas the

industrial consumers pay the highest price. The consumer mix is dependent on the level of

industrialisation and agricultural activity in the state.

Figure 10

0

20

40

60

80

100

Rajasthan Haryana AP MP TN UP JK

Agricultural Domestic and non-domestic Industiral Others

Consumer Breakdown in FY10

(%)

Source: PFC, Fitch


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States Affected by Agricultural Consumers

Discoms in Haryana, AP and TN had the lowest tariffs for agricultural consumers at INR0.27,

INR0.21 and INR0 per unit respectively in FY10, compared to the national average of INR0.89

per unit for agricultural consumers.

The impact on average selling price per unit for discoms in Haryana and AP was magnified bythe large percentage of electricity volumes sold to agricultural consumers. Discoms in Haryana

and AP sold 38% and 31% of electricity volumes to agricultural consumers, compared to the

national average of 23%.

Discoms in Rajasthan and MP also sold high percentages of electricity volume to agricultural

consumers in FY10, at 39% and 30% respectively, but the tariff charged to these consumers

was high and hence the impact on the average selling price per unit was limited.

Figure 11

0.0

0.5

1.0

1.5


Average price paid All India average price(INR/Kwh)

Source: Fitch, PFC

Average Price Per Unit Paid by Agricultural Consumers in FY10

States Affected by Industrial Consumers

Discoms in AP, Rajasthan, Haryana and UP sold lower percentages of electricity volume to

industrial consumers in FY10, at 31%, 26%, 26% and 25% respectively, compared to the

national average of 34%. As tariffs to industrial consumers are the highest, a lower percentage

of industrial consumer affects the average selling price for the state as a whole. The problem in

FY10 was compounded in AP, Rajasthan and Haryana by low levels of pricing to industrial

consumers at INR3.78, INR3.86 and INR4.07 per unit respectively, compared to the national

average of INR4.4 per unit.

Figure 12

0

1

2

3

4

5


Average price paid All India average

(INR/Kwh)

Source: Fitch, PFC

Average Price Per Unit Paid by Industrial Consumers in FY10


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States Affected by Domestic and Non-Domestic Consumers

Discoms in TN and UP had high percentages of electricity volume sold to domestic and non-

domestic consumers in FY10, at 39% and 47% respectively, compared to the national average

of 33%. Discoms in these states also had low average selling prices for domestic and non-

domestic consumers in FY10, at INR3.04 and INR2.41 per unit respectively, compared to the

national average of INR3.4 per unit.

Figure 13

0

1

2

3

4

5


Average price paid All India average price(INR/Kwh)

Source: Fitch, PFC

Average Price Per Unit Paid by Domestic and Non Domestic Conumers in

FY10

The discom in JK had a low average selling price per unit because of its extremely low price

per unit to all categories of consumer.

Based on the above analysis, Fitch makes two observations about discoms in high book/cash

loss-making states. First, most of book/cash loss-making states had low average selling prices

per unit, due to low selling prices to one or multiple categories of consumer. Second, discoms

with high book/cash losses had a higher percentage of power sold to agricultural consumers

and a lower percentage sold to industrial consumers.

High ATC Losses

Discoms in states with high cash and book losses also had high ATC losses in FY10, with JK,

MP,UP, Haryana and Rajasthan recording ATC losses of 70%, 44% and 41% respectively,

compared to the national average of 27.2%. Collection efficiency in these states is also low, at

74%, 86% and 81% respectively, which has contributed to the higher ATC losses.

Figure 14

0

20

40

60

80

JK MP UP Rajasthan Haryana TN AP

0

20

40

60

80

100

ATC loss (LHS) All India average ATC loss (LHS) Collection efficiency (RHS)(%)

Source: PFC

ATC Loss and Collection Efficiency in FY10

(%)

Subsidy per Unit

Discoms in Rajasthan, AP and Haryana had high subsidy booked per unit in FY10, which led to

high average realisation per unit including subsidy. Hence, the timely receipt of subsidy wasessential to the healthy financial profiles of discoms in these states. The FY10 subsidy per unit

for discoms in MP, TN and UP was INR0.33, INR0.25 and INR0.32, respectively.


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Figure 15

0

1

2

3

4

5


Average selling price per unit excluding subsidy Subsidy booked per unit

Break-Down of Average Selling Price Per Unit Including Subsidy in FY10

(INR/kwh)

Source: Fitch, PFC

Untimely Subsidy

Discoms in Rajasthan and AP made book profits of INR0bn and INR0.65bn in FY10, but made

large cash losses. Subsidy formed 149% and 42% of revenue from sales of power in FY10 for

discoms in Rajasthan and AP, respectively. The subsidy booked by discoms in Rajasthan and

AP was INR118bn and INR67bn in FY10, while revenues from sales of power were INR80bn

and INR161bn, respectively. However, subsidy realised was low at INR8.7bn and INR30.3bn,

respectively, or 7% and 45% of the subsidy booked. This led the discoms in these states to

report cash losses for FY10.

Figure 16

0

40

80

120

160

Rajasthan Haryana AP

Subsity received as a % of subsidy booked Subsidy booked as a % of revenue from sale of power

(%)

ource: Fitch, PFC

Subsidy Received and Subsidy Booked in FY10

Discoms in Haryana booked a high subsidy of INR32.8bn in FY10 on revenue from sales of

power of INR80bn, but received INR32.4bn and hence did not record a high cash loss.

Average Cost Price per Unit

Figure 17

0

1

2

3

4

5

6

Rajasthan Haryana TN UP AP MP JK

Purchase/generation cost per unit Price of power purchased from NTPC plants

Price through power exchanges

(INR/Kwh)

ource: Fitch, PFC

Purchase Cost Per Unit vs NTPC and Power Exchanges


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10

The purchase cost per unit of discoms in TN, Rajasthan, Haryana, and UP was 63%, 61%,

41%, and 24% higher, respectively, than the average selling price of power through NTPC

plants in FY10. This indicates that discoms in these states were not able to tie up long-term

power at competitive rates. Hence they were heavily dependent on short-term purchases to

meet their electricity requirements. This resulted in higher weighted average cost of power

purchase for discoms in these states.

A comparison of the total volume of power purchased by discoms in these states versus their

short-term power purchase (bilateral + exchange + unscheduled interchange) volumes shows

that in FY10 discoms in TN, Haryana, Rajasthan and UP purchased 22%, 15%, 14% and 8%

respectively, of their total power purchase from short-term markets. As short-term prices of

electricity are higher than long-term prices, this led to the power purchase cost of discoms in

these states being higher compared to discoms in other states.

Figure 18

-15

0

15

30

45

60

75

TN Haryana Rajasthan UP MP AP JK

-20

-10

0

10

20

30

Short term volumes (LHS)

Power purchase volumes (LHS)

Power purchased through short term (RHS)(Bn kwh)

Source: PFC

Short Term Volumes and Total Power Purchased

(%)

Credit Implication Impact on DiscomsThe financial profile of discoms in top five loss-making states is weak due to the reasons

highlighted above and without any policy action to improve operational performance, the losses

could increase further. The discoms in these five states had a negative net worth of INR559bn

and aggregate loans from financial institutions/banks and bonds totalling INR588bn at FYE10.

To remain operational these discoms would require increasing funds on a regular basis. Given

the financial profiles of these discoms, if the banks were to stop giving/revolving loans, the

discoms would come under severe pressure and could default on their loans, leading to rating

downgrades.

Impact on Power Traders and Generating Companies

The discoms buy their power either through power traders or generating companies (hereafterreferred to as power suppliers). The financial profile of power suppliers can also come under

pressure for the following reasons:

increased working-capital requirements if payments are not made on time by discoms;

delays in loan servicing due to cash flow mismatches;

net-worth criteria for a „category-I‟ licensee power trader allowed to trade unlimited power

is only INR500m, and a default on only 150m units assuming a price of INR3.5/unit can put

the net-worth of the trader at risk.

Impact on Suppliers

A delay in payments by discoms can have a cascading effect on the value chain, with delayed

payments to generators leading to delayed payments to coal suppliers and equipment suppliers,

thus stretching their working-capital cycles and affecting their leverage profiles.


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Annex 1

Figure 19

State Discom Classification

Quadrant I: States with Increasing Profits

1 Sikkim2 Rajasthan3 Kerala4 Gujarat

Quadrant II: States with Decreasing Profits1 West Bengal2 Meghalaya3 Tripura4 Andhra Pradesh5 Karnataka6 Puducherry7 Chattisgarh8 Goa9 Maharashtra

Quadrant III: States with Decreasing Losses1 Jharkhand2 Arunachal Pradesh3 Delhi4 Punjab5 Uttarakhand

Quadrant IV: States with Increasing Losses1 Bihar2 Orissa3 Assam4 Manipur5 Mizoram6 Nagaland7 Haryana8 Himachal Pradesh

9 Jammu & Kashmir10 Uttar Pradesh11 Tamil Nadu12 Madhya Pradesh

Source: Fitch


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Losses in Indian State Power Utilities 13

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