Corporates

Utilities / India

Losses in Indian State Power Utilities

Five States Affecting the Sector Negatively Special Report
Key Rating Drivers
Weak Financial Profile: The financial profile of Indias 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 Limiteds (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.

Related Research
India Power Sector Capex (December 2011) State Power Utilities and States' Fiscal Consolidation (November 2011) India Power Traders: Risks Outweigh Rewards (October 2011)

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.

Other Outlook
www.fitchratings.com/outlooks

Analysts
Salil Garg +91 11 4356 7244 salil.garg@fitchratings.com Vivek Jain +91 11 4356 7249 vivek.jain@fitchratings.com

www.fitchratings.com

2 February 2012

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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

Net Aggregate Losses of All State Power Utilities

(INRbn) 400 300 200 100 0 FY07 FY08 FY09 FY10 131 19 125 34 248 256 295 288 Book loss Cash loss

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

Distribution of Book Loss

At discom level (%) 150 100 50 0 -50 FY07 FY08 FY09 FY10 At genco/transco/trading companies level

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)

Losses in Indian State Power Utilities February 2012

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Figure 3

Losses of Discoms Selling Directly to Consumers

(INRbn) 400 294 300 200 100 0 FY07 Source: PFC, Fitch FY08 FY09 FY10 143 83 148 111 226 275 Book loss Cash loss 348

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

Quadrant-II
(INRbn) 10 5

Quadrant-I
(INRbn) 3

Profits

0 -5 -10 -15 -20 FY08 Source: PFC FY09 FY10

0 FY08 Source: PFC FY09 FY10

Quadrant-III
(INRbn) -15 -20 -25 -30 -35 FY08 Source: PFC FY09 FY10

Quadrant-IV
(INRbn) -1 25 -1 45

Losses

-1 65 -1 85 -205 -225 -245 -265 FY08 So urce: P FC FY09 FY1 0

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).

Losses in Indian State Power Utilities February 2012

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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 Book Losses in FY10
Rank 1 2 3 4 5 Total Name TN UP MP JK Haryana Book loss in FY10 97 53 33 21 15 220 Net aggregate Net aggregate Net aggregate book loss Book loss book loss Book loss book loss in FY10 (%) in FY09 in FY09 (%) in FY08 in FY08 (%) 35 78 35 35 24 19 44 19 41 28 12 25 11 18 12 8 13 6 14 10 6 15 7 8 5 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-lossmaking discoms over FY08-FY10.
Figure 6

Cash Losses Over FY08-FY10 for Discoms in States with Highest Cash Losses in FY10
Rank 1 2 3 4 5 Name Rajasthan TN UP MP AP Cash Net aggregate loss in cash loss FY10 in FY10 (%) 105 30 89 25 48 14 30 9 28 8 300 86 Cash Net aggregate loss in cash loss FY09 in FY09 (%) 64 22 73 25 39 13 22 8 52 18 250 85 Cash Net aggregate loss in cash loss FY08 in FY08 (%) 21 19 28 25 35 32 15 14 -2.9 -3 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 shortterm power purchase. The performance of a discom can be affected by one or a combination of the factors mentioned above.
Figure 7

Analytical Framework
Gross Margin (Including Subsidy) Average Selling Price Including Subsidy Average Selling Price Excluding Subsidy Average Cost of Power Purchase % Short-Term Power Purchased

Subsidy

Differential Pricing

Amount

Agricultural Consumers

Timeliness

Industrial Consumers

Domestic and NonDomestic Consumer

Consumer Mix

Agricultural Consumers

Industrial Consumers

Domestic and NonDomestic Consumer

ATC Loss
Source: Fitch

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

Gross Margins Including Subsidy of Discoms in FY10

(INR per unit) 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Rajasthan AP Haryana MP UP TN JK Source: Fitch, PFC; Gross Margin = average revenue per unit - average power purchase cost per unit, Revenue excludes other income

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

Average Selling Price per Unit of Discoms Excluding Subsidy in FY10

(INR per unit) 3

0 Haryana TN MP AP UP Rajasthan JK Source: Fitch, PFC; Average selling price = income from sale of power/ net input energy

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

Consumer Breakdown in FY10

(%) 100 80 60 40 20 0 Rajasthan Source: PFC, Fitch Haryana AP MP TN UP JK Agricultural Domestic and non-domestic Industiral Others

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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 by the 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

Average Price Per Unit Paid by Agricultural Consumers in FY10

(INR/Kwh) 1.5 Average price paid All India average price

1.0

0.5

0.0 Rajasthan Source: Fitch, PFC Haryana AP MP TN UP JK

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

Average Price Per Unit Paid by Industrial Consumers in FY10

(INR/Kwh) 5 4 3 2 1 0 Rajasthan Source: Fitch, PFC Haryana AP MP TN UP JK Average price paid All India average

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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 nondomestic 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 nondomestic consumers in FY10, at INR3.04 and INR2.41 per unit respectively, compared to the national average of INR3.4 per unit.
Figure 13

Average Price Per Unit Paid by Domestic and Non Domestic Conumers in FY10
(INR/Kwh) 5 4 3 2 1 0 Rajasthan Source: Fitch, PFC Haryana AP MP TN UP JK Average price paid All India average price

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

ATC Loss and Collection Efficiency in FY10

(%) 80 60 40 40 20 0 JK Source: PFC MP UP Rajasthan Haryana TN AP 20 0 ATC loss (LHS) All India average ATC loss (LHS) Collection efficiency (RHS) (%) 100 80 60

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 was essential 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.

Losses in Indian State Power Utilities February 2012

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Figure 15

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

Average selling price per unit excluding subsidy (INR/kwh) 5 4 3 2 1 0 Rajasthan Source: Fitch, PFC Haryana AP MP TN UP JK Subsidy booked per unit

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

Subsidy Received and Subsidy Booked in FY10

Subsity received as a % of subsidy booked (%) 160 120 80 40 0 Rajasthan ource: Fitch, PFC Haryana AP Subsidy booked as a % of revenue from sale of power

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

Purchase Cost Per Unit vs NTPC and Power Exchanges

Purchase/generation cost per unit Price through power exchanges (INR/Kwh) 6 5 4 3 2 1 0 Rajasthan ource: Fitch, PFC Haryana TN UP AP MP JK Price of power purchased from NTPC plants

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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

Short Term Volumes and Total Power Purchased

(Bn kwh) 75 60 45 30 15 0 -15 TN Source: PFC Haryana Rajasthan UP MP AP JK 0 -10 -20 Short term volumes (LHS) Power purchase volumes (LHS) Power purchased through short term (RHS) (%) 30 20 10

Credit Implication
Impact on Discoms
The 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 (hereafter referred 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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Fitch believes that if the outlook of the sector is to improve then the top five loss-making utilities have to get their act together. They should focus on improving their average selling price per unit (through timely tariff hikes and reduction in ATC losses) and lowering their average cost of power purchase (through long-term power tie-ups and lower dependence on short-term power purchase).

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Annex 1
Figure 19

State Discom Classification

Quadrant I: States with Increasing Profits
1 2 3 4 Sikkim Rajasthan Kerala Gujarat

Quadrant II: States with Decreasing Profits 1 West Bengal 2 Meghalaya 3 Tripura 4 Andhra Pradesh 5 Karnataka 6 Puducherry 7 Chattisgarh 8 Goa 9 Maharashtra Quadrant III: States with Decreasing Losses 1 Jharkhand 2 Arunachal Pradesh 3 Delhi 4 Punjab 5 Uttarakhand Quadrant IV: States with Increasing Losses 1 Bihar 2 Orissa 3 Assam 4 Manipur 5 Mizoram 6 Nagaland 7 Haryana 8 Himachal Pradesh 9 Jammu & Kashmir 10 Uttar Pradesh 11 Tamil Nadu 12 Madhya Pradesh
Source: Fitch

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