MANAGEMENT DISCUSSION AND ANALYSIS 2014-15

Your Company jointly promoted by Gujarat Electricity Board (GEB) [now Gujarat Urja Vikas Nigam Ltd. (GUVNL)], Gujarat Alkalies and Chemicals Ltd. (GACL), Gujarat State Fertilizers and Chemicals Ltd. (GSFC), and Petrofils Co-operative Ltd. (PCL) to cater to their captive power requirements has completed thirty years on 1st June, 2015, since its establishment in the year 1985.

It is a matter of pride that your Company, which began as the first group captive power plant in the country, has transformed into a dynamic Independent Power Producer (IPP) with total installed generation capacity of 815 MW and up to 51 MW Wind Power Project under implementation.

SECTOR OVERVIEW

Power Generation in India: [Source: Central Electricity Authority (CEA)]

The total power generation in the country during FY 2014-15 was 1048.673 Billion Units (BUs) as against the target of 1023 BUs for the year, about 102% of the target for the year. The annual growth in the energy generation during the year has been 8.43% as compared to 6.04% over same period last year i.e. FY 2013-14.

The installed generation capacity in the country, as on 31st March, 2015 was 2,71,722 MW. Coal, with more than 60% share, is still the primary source of fuel for power generation in India.

Electricity - Capacity Addition and Generation Target Vs. Achievement (2014-15):

The Indian power sector has historically been characterized by demand-supply gap which has been increasing over the years. Though the Capacity Addition and Electricity Generation for the 12th Plan period (FY 2012 to 2017) is yet to be finalized, the National Electricity Plan (NEP) 2007, has projected total capacity addition of 88537 MW, for the 12th Plan as under: 

Thermal Plant Load Factor (PLF):

The All India Thermal PLF (%) was low at 64.46% for FY 2014-15 as compared to 65.6% during FY 2013-14. This was mainly on account of coal / Natural Gas shortages, transmission constraints, delay in stabilization of newly commissioned units etc.

Fuel Availability for Power Generation:

Availability and quality of coal and availability of gas for power sector continued to be a critical issue for thermal generation growth.

Coal:

With about 1,64,636 MW i.e. 60.59% of the installed capacity contributed by coal based Power Plants coal remains a key fuel for power generation.

As per the Report of the Working Group on Power-12th Plan (2012-17), Coal-based generation is expected to continue to be the brdominant source of electricity during the 12th plan period and beyond. Out of the total capacity addition of 88,537 MW envisaged during the 12th plan, coal/lignite-based capacity addition is expected to be about 69,800 (78.84%). Hydro, Nuclear and Gas/LNG based generation is expected to constitute about 10,897 MW (12.31%), 5,300 MW (5.99%) and 2,540 MW (2.87%). Thus, estimated coal requirement would be 842 MT at the end of 12th Plan and 1040 MT at the end of 13th Plan. [Source: Central Electricity Authority (CEA)]

As against the estimated coal requirement of 842 MT by the end of 12th Plan (Year 2016-17), the coal availability shall be 550 MT, thus a shortfall of 292 MT. The Power Utilities are expected to resort to import of around 155 MT of coal to meet the shortage in coal supply.

Gas:

Owing to the problem of reducing availability of Natural Gas from the domestic gas fields and also due to increasing cost of Imported R-LNG, the gas based generation had a negative growth of 7.74% during FY 2014-15 corresponding to the same period last year. The shortfall in supply to power sector is due to decline in production of gas from the domestic gas fields especially from KG-D6 gas field.

Gas available from KG basin has been allocated to existing projects only and Power sector has been given third priority in gas allocation after Fertilizer and LPG Sectors.

The Ministry of Power (MoP) has recommended that Power sector be given the highest priority as far as domestic gas allocation is concerned in view of power shortage in the country.

Power Sector - Policy Developments:

As per Central Electricity Regulatory Commission's (CERC's) FY 09-14 Tariff Norms & Regulations, the base rate of Return on Equity (RoE) was raised from 14% (post-tax) to 15.5% to be grossed up with normal tax rate as applicable to the concerned utility in order to make the sector more attractive to developers. Also, there is an additional 0.5% RoE if a project is commissioned within given timelines. [Regulation 15 of Central Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulations, 2009-Appendix II.]

Incentives are linked to plant availability factor instead of PLF for thermal power plants. 

 Mega Power Project Policy

Policy guidelines for setting up mega power projects were revised in FY 2010 to smoothen the procedures. A thermal power project of capacity 1000 MW or more is eligible to gain benefits of this Policy. As per the recent amendment mandatory condition of inter-state sale of power for getting mega power project status has been removed. Also, mega power projects can sell power outside the long term Power Purchase Agreement (PPA) in accordance with the National Electricity Policy (NEP), 2005 and Tariff policy, 2006. For projects having requisite power tied up through tariff based competitive bidding, it is no longer required to procure the equipments for the project through International Competitive Bidding (ICB).

Restructured - Accelerated Power Development & Reforms Programme (R-APDRP)

The APDRP launched in the 10th Plan was continued in the 11th Plan modified and renamed as R-APDRP with the main objective of bringing about actual, demonstrable reduction in Aggregate Technical & Commercial (AT&C) losses, thus improving the quality and reliability of power supply. Establishment of reliable and automated systems for sustained collection of accurate base line data, and the adoption of Information Technology in the areas of energy accounting will be essential before taking up the regular distribution strengthening projects.

Apart from this, certain initiatives viz. the introduction of open access, formulation of guidelines for Competitive Bidding of tariff, setting up of and enhancing the powers of Central and State Regulatory Commissions, restructuring and unbundling of State Electricity Boards (SEBs) into separate generation, transmission and distribution entities, and facilitation of trading of surplus capacity have attracted more players to this Sector.

Integrated Power Development Scheme

The MoP, GoI vide Office Memorandum No. 26/1/2014-APDRP dated 3/12/2014 implemented the Integrated Power Development Scheme (IPDS) for providing financial assistance under the said Scheme to all Discoms including private sector Discoms and State Power Departments, with the following components :

(i) Strengthening of sub-transmission and distribution networks in the urban areas;

(ii) Metering of distribution transformers/feeders/consumers in the urban areas and

(iii) IT enablement of distribution sector and strengthening of distribution network for completion of targets laid down under R-APDRP for 12th and 13th Plans by carrying forward the approved outlay for R-APDRP to IPDS.

Renewable Energy

Considering the ever increasing electricity demand and inadequate availability of fuel, there is a dire need to tap various new sources of energy including renewable energy. Further, growing awareness with regard to benefits of clean energy have also prompted renewed focus on renewable energy by all the stakeholders in the energy ecosystem.

Taking into consideration the growing threat of climate change, the need to develop domestic supply options to the maximum extent and the need to diversify energy sources, renewable energy sources remain important to India's energy Sector.

Renewable Energy accounted for 12.3%, i.e. 27,541.71 MW, of the total installed capacity up to FY 2014-15.[Source: Central Electricity Authority (CEA)].

As per the Ministry of New and Renewable Energy (MNRE), GoI statistics, against a target of 3770 MW of Grid Interactive Power for 2014-15, the Total Deployment in 2014-15 was 4089 MW of which Wind power accounted for about 56.54%, Small Hydro power accounted for about 6.16%, Power from Bagasse based Cogeneration accounted for about 8.80%, whereas Solar power accounted for about 27.19%, Biomass power and Waste to Power etc. accounted for the remaining capacity addition of 1.30%. [Source: Website of MNRE]

With fuel shortage becoming a reality in the last couple of years, it is imperative for India to have a focused strategy for renewable energy. The Government has already started acting on this agenda. Some of the significant steps taken recently are Policy envisaging that all states should mandatorily meet Renewable Purchase Obligations (RPO) of 5 per cent of total generation which goes up by 1 per cent with every passing year till FY2020 to reach a level of 15 per cent. Launch of Jawaharlal Nehru National Solar Mission (JNNSM), which aims to ensure that solar energy technologies in the country achieve grid parity by 2022. It has plans for deployment of 20 GW of solar power by 2022. Imposition of Green Energy Cess of 7 50/- per tonne for all domestic and imported coal based projects. The funds raised will be utilized to drive development in the renewable energy sector.

CERC also issued new guidelines for tariff determination for all renewable energy sources to give further impetus to the development of this sector. A new scheme on Generation Based Incentive (GBI) was introduced for the wind power projects and a similar scheme is under development for the solar power projects as well.

With increasing focus on environment related issues, power projects, employing clean and environment-friendly technology (hydroelectric and other renewable energy sources) can also earn carbon credits, which are traded extensively in the international market; thus providing an additional source of revenue. 

OPPORTUNITIES AND CONCERNS

Opportunities:

With the increase in the per capita income levels there will be substantial increase in the per capita electricity demand. The National Electricity Policy (NEP) 2005 aimed at providing a per capita electricity availability of 1000 kWh by FY 2012; against this target, the provisional per capita electricity consumption was 914.41 kWh for FY 2012-13 and 957 kWh (Provisional) for FY 2013-14. [Source: Central Electricity Authority (CEA)].

Considering the above demand-supply gap, there will be enormous opportunities for the Sector.

In order to provide cheaper power to consumers, large size power projects are being developed at different locations by various project developers.

Your Company is in the process of implementing a 51 MW Wind based Power Projects at Village Kotdapitha and Jamarvada respectively of Taluka Babra, Dist.: Amreli, Gujarat.

India is endowed with huge renewable sources for energy. Both technology routes for conversion of solar radiation into heat and electricity, Solar Thermal and Solar Photovoltaic (PV), can effectively be harnessed providing huge scalability for solar power in India. With the increased focus on Research and Development for reducing the costs of setting up solar power projects and the tariffs being offered for solar power, the sector provides bright opportunities.

Key risks and Concerns:

Power sector is a highly capital intensive industry with long gestation periods before commencement of revenue streams (construction/commissioning periods of 4-5 years) and an even longer operating period (over 25 years). Since most of the projects have such a long time frame, there are some inherent risks in both the internal and external environment.

The macroeconomic factors like the growth of the economy, interest rates, as well as the political and economic environment have a significant effect on the business environment and the sector as a whole. 

The graduation from the regulated regime to a competitive scenario has made developers conscious of the costs incurred (both capital and operating costs) and delays in equipment delivery schedules due to inadequate manufacturing capacity in the country.

New policies have boosted the security of utilities' revenue directly impacting both their willingness and ability to pay for the power purchased. Over the long term, unless Aggregate Technical and Commercial (AT&C) losses are reduced, the ability of state utilities to meet their obligations will be of grave concern.

Considering the proposed capacity addition and the capital intensive nature of power projects, high level of debt financing will be required. The company, sector and group level exposures of various banks and insurance companies need to be increased in order to adequately fund the proposed capacity addition.

Your Company is dependent on the domestic market for its business and revenues. The Company's power generating facilities are located in Gujarat and entire revenue of the Company are derived from the domestic market. The Power Purchase Agreement (PPA) for 165 MW Vadodara Station II is valid upto November 2017.These factors may potentially expose the Company to risks of a significant nature to the state of economy. Adverse changes in the Government policies or regulations, the taxes levied by the central or state Governments or removal of tax concessions, exemptions or incentives, or claims by tax authorities may affect the financial condition and operational results of the Company.

Generation of Power at the Company's Power Stations can be adversely affected due to various factors including non­availability of lignite/Natural gas, grid disturbances and load management in the grid. Your Company has entered into Agreements with gas suppliers for adequate supply of Natural Gas/R-LNG- for its gas-based Power Stations at Vadodara Plant. However, the dwindling supplies from domestic gas fields at brsent and increasing price of imported R-LNG shall have a considerable impact on the generation at Vadodara Plant. The Gas Supply Agreement (GSA) with GAIL(India) Ltd. for the supply of domestic gas is valid up to 31-12-2015. Your Company has initiated steps for the extension of the GSA for futher period of 5 years.

The increasing price of imported R-LNG has resulted in considerable reduction in use of the fuel for generation of electricity for the Grid. This will attract Take or Pay (ToP) liability as per the GSA dated 26-12-2008, which is valid till 31-12­2028. Your Company has already taken up the matter with GAIL (India) Ltd. for its amicable resolution. To remain unaffected by the grid disturbances, your Company has developed systems to isolate its Power Stations from the grid. To mitigate the concerns, external environment is monitored and internal environment is managed on a continuous basis.

REVIEW OF COMPANY'S BUSINESS:

The Company currently has a combined installed capacity of 815 MW at its locations at Vadodara Plant and Surat Lignite Power Plant (SLPP) including 5 MW PV based Solar Power Plant at SLPP.

MANAGEMENT CONTROL, INTERNAL CONTROL AND INTERNAL AUDIT SYSTEMS:

Your Company has put in place internal control systems and processes commensurate with its size and scale of operations. An Enterprise Resource Planning System developed by SAP has been implemented. This System has control processes designed to take care of various audit requirements. In addition, the Company has an Internal Audit and review by external independent firm of Chartered Accountants and br-audit of payments by internal team of Accountants/Agencies which oversees the implementation and adherence to various systems and processes and brparation of Financial Statements as per Generally Accepted Principles and Practices. The internal control measures such as defining various levels of the authority through delegation of powers, well laid down procurement procedures, checks and balances in the financial system to safeguard the assets, budgetary controls and variance analysis are in place.

The procurement and operational maintenance activities are planned well in advance to avoid any possible risk of late delivery of materials/inputs, delay in attending to maintenance needs etc. Your Company stores and maintains all the relevant data and information as a back-up, to avoid any possible risk of loss of any important business data.

A qualified and independent Audit Committee of Directors periodically reviews the internal audit reports.

FINANCIAL REVIEW: ON STAND ALONE BASIS:

The financial statements are brpared under historical cost convention, on accrual basis, in accordance with the generally accepted accounting principles in India. The applicable mandatory Accounting Standards as brscribed under section 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rule 2014 have been followed in brparation of these financial statements except in so far as the said provisions are inconsistent with the provision of the Electricity Act, 2003.

Your Company's total income for the year ended 31st March, 2015 was Rs. 1,25,787 Lacs as compared to Rs. 1,40,750 Lacs in the brvious year. The total income includes earnings from sale of electrical energy of 7 1,20,906 Lacs as compared to Rs. 1,37,104 Lacs recorded in the brvious year.

Your Company has earned Rs. 3,033 Lacs as interest on deposits by parking surplus funds as a result of prudent management of working capital. (P.Y. Rs. 1,804 Lacs).

The fuel cost has decreased from Rs. 70,231 Lacs to Rs. 57,537 Lacs. The decrease in fuel cost due to lower performance of gas based power stations by approx.12%and outage of SLPP Unit 1 exceeding 120 days was somewhat offset by increase in consumption of lignite used in SLPP Units 3 & 4 (where the generation was higher by more than 20% as compared to last year) and allied fuels used in lignite based power stations due to increased fuel prices and use of imported coal.

Finance cost has decreased from Rs. 8,827 Lacs to Rs. 7,800 Lacs due to reduction of interest on term loan consequent to scheduled repayment of term loans.

Debrciation has decreased from Rs. 15,551 Lacs to Rs. 12,003 Lacs as debrciation on certain power plants' assets which was hitherto charged on straight line method at the rates specified in CERC's Tariff Regulation, 2009 is now charged over the balance useful life as specified by CERC (Terms and Conditions of Tariff) Regulations,2014.

The Profit before tax was Rs. 24,943 Lacs as compared to Rs. 25,736 Lacs in the brvious year. The above profit was after considering the cost of replacement of stator and other related expenditure to the tune of Rs. Rs. 1,851 Lacs (shown as Exceptional Item) incurred due to technical snag in the stator winding generator of unit 1 at Surat Lignite Power Plant.

If the above mentioned accidental outage of about 4 months were not there, the profit before tax would have been more by about Rs. 2,227 Lacs due to full recovery of fixed costs, in addition to the exceptional cost of Rs. 1851 Lacs incurred as mentioned above.

The Corporate Income Tax Provision for the year was Rs.6,229 Lacs after adjusting MAT credit entitlement to the tune of Rs. 134 Lacs. During the brvious year the same was Rs. 4,416 Lacs after adjusting MAT credit entitlement of Rs. 1,000 Lacs. While filing the income tax return for this year, Company is planning to utilise the said MAT credit entitlement.

The net profit of Rs. 12,631 Lacs has been arrived at after taking into account the above mentioned provision for current Income tax, Deferred Tax liability of Rs. 5783 Lacs, Wealth Tax liability of Rs. 104 lacs and Tax adjustment of earlier years Rs. 197 Lacs.

During the year, Gross Block has increased from Rs. 3,80,635 Lacs to Rs. 3,82,420 Lacs. The increase was mainly in the Buildings, Plant & Machinery and Computer Software. 

The capital work in progress includes Rs. 1,797 lacs towards implementation work of 51 MW Wind Project at Taluka Babra, District Amreli, Gujarat with total project cost of Rs. 32,838 Lacs.

The long term advance includes Rs. 6,256 Lacs as secured advance towards the above project and current liabilities includes Rs. 1534 lacs as project creditors towards this project.

The total dividend payout (proposed) for the year @ Rs. 2.50 per Equity Share is Rs. 4,555 Lacs (P.Y. 7 2.50 per Equity Share amounting to Rs. 4,424 Lacs) including Corporate Tax on Dividend.

Your Company has further invested Rs. 4718 Lacs during the year in to the Equity Share Capital of M/s Bhavnagar Energy Company Limited (BECL), an Associate, taking the total investment to Rs. 18,108 Lacs as on 31st March 2015.

As on 31st March 2015, the net worth of the Company stood at Rs. 1,83,546 Lacs.

CONSOLIDATED FINANCIAL RESULTS:

The Consolidated Financial Results are brpared after incorporating financial results of GIPCL Projects and Consultancy Company Limited (GIPCO), 100% subsidiary of GIPCL and Bhavnagar Energy Company Limited (BECL), an Associate as per applicable accounting standards of Indian GAAP.

SUBSIDIARY COMPANY:

Your Company has incorporated a 100% wholly owned Subsidiary under the name and style of "GIPCL PROJECTS AND CONSULTANCY COMPANY LIMITED" in 2012. The total income of the Subsidiary Company for the F.Y. 2014-15 was Rs. 9.71 Lacs as compared to Rs. 18.52 Lacs in the brvious period.

The Subsidiary Company is expected to expand its operations in the years to come.

ASSOCIATE COMPANY:

Your company has invested Rs. 18108 Lacs in the Equity Share capital of BECL with share holding of 27.67%. The last audited Balance Sheet available for consolidation is of 31.03.2014. Considering the net worth of BECL as on that date our value of investment works out to Rs. 17986 Lacs. BECL is under project implementation stage and yet to start its commercial operations.

HUMAN RESOURCE & INDUSTRIAL RELATIONS:

Humans are considered as one of the most critical resources in the business which can be continuously smoothened to maximize the effectiveness of the Organization. Human resources build the Enterprise and a sense of belonging inculcates the spirit of dedication and loyalty amongst them towards strengthening the Company's sustainable growth. All personnel continue to have healthy, cordial and harmonious approach thereby enhancing their contribution to the Company. The strength of your Company lies in its team of highly competent and highly motivated personnel. This has made it possible for your Company to make significant improvements and progress in all areas of activities. During the year 2014-2015, the Company maintained its high standards of Safety. Your Directors place on record their sincere apbrciation for the unstinting efforts and contribution put in by the employees of the Company.

The Company continued in its endeavor to impart appropriate and relevant training to its employees to upgrade skill to meet the challenges that are ahead and to enhance their performance. The Company has also taken up an exercise on career growth and planning by identifying potentials and training needs of employees by engaging professionals in the field.

It is a matter of great pride that your Company has been brsented with the "Gold Award" in the area of "Innovation in Employee Retention Strategies" by Greentech Foundation, New Delhi under its Greentech HR Award.

The industrial relations remained cordial throughout the year at Vadodara and SLPP Plants.

CORPORATE SOCIAL RESPONSIBILITY AND WELFARE:

Being a conscientious corporate body, your Company has been actively involved in the socio-economic development and welfare of the people living around the Power Plants at Vadodara and SLPP through Society for Village Development in Petrochemicals Area (SVADES) and Urja Foundation at Vadodara and through Company promoted NGO - Development Efforts for Rural Economy and People (DEEP) at SLPP.

Major Corporate Social Responsibility (CSR) initiatives by your Company revolve around building community infrastructure, focus on women empowerment and their role in development. Interventions include Education, Community Health, Livelihood Development and Rural Infrastructure Development like roads, culverts in surrounding villages. Your Company is also co-sponsoring a Mid-day meal Scheme at Vadodara where more than 50,000 children of Government schools are provided hygienic food.

CAUTIONARY STATEMENT:

Statements in the Management Discussion and Analysis forming part of the Board's Report, describing the objectives, projections, estimates, expectation and brdictions of the Company may be "Forward Looking" statements within the meaning of applicable security regulations and laws. These statements are based on certain assumptions and expectations of future events. The Company assumes no responsibility in respect of forward looking statements herein which may undergo changes in future on the basis of subsequent developments, information or events.