GROUP 4

LUOTANG POWER : VARIANCES EXPLAINED

INTRODUCTION
600 MW coal-fired power company. Located in Hubei Province in Central China. General manager, Tan Min Yi need to make presentation about:

Poor financial performance in year 2011 Consideration of 2,000 MW expansion Promotion as the companys Executive Vice President position

MAIN ISSUE

The poor plant performance due to the complexity nature of the contracting environment between Luotang Power Company and its supplier and customer that lead to the poor financial results of the plant

ANALYSIS OF THE ISSUE

INCOME STATEMENT ANALYSIS

2010 Revenue Normal Take 1,265,769 1,271,538 2011 Changes

Excess Energy
Total Revenue

237,301
1,503,070

90,566
1,362,104 (140,966)

Operating Costs Coal Cost Fixed Operating and Maintenance Depreciation Expense Variable Operating and Maintenance Insurance Costs Total Operating Costs 362,062 38,115 349,342 60,058 23,432 833,009 320,183 39,068 348,549 51,886 23,666 783,352 49,657

Net Profit from Operations

670,061

578,752

(91,309)

VARIANCE ANALYSIS

1. REVENUE VARIANCE ANALYSIS

Normal Take (3,000,000 MWh)
Qty Variance: 2011 2010 2010 = 3,000,000 3,000,000 421.923 = 0

Price Variance : 2011 2010 2011 = 423.846 421.923 3,000,000 = 5,769,000 (Favorable)

EXCESS ENERGY (AMOUNT OF MWH ABOVE 3,000,000 MWH)

Rate / Year 2010 RMB 237301 / 937,377MWh =RMB 0.2532 Price Variance: Rate / Year 2011 RMB 90,566 / 427,351MWh = RMB 0.2119

2011 2010 2011 =

90,566 427,351

1,000

237,301 937,377

1,000 427,351

= 17,619,735(Unfavorable) Qty Variance: 2011 2010 2010 = 427,351 937,377

237,301 937,377

1,000

= 129,115,265(Unfavorable)

Total Take (Normal Take + Excess Energy)

Price Variance: = 2011 2010 2011 = 397.422 381.744 3,427,351 = 53,734,009 (Favorable) Quantity Variance: 2011 2010 2010 = 3,427,351 3,937,377 381.744 = 194,699,365(Unfavorable)

2. COAL COST VARIANCE ANALYSIS

Rate / Year 2010
RMB 362,062,000 0.347 3,937,377

Rate / Year 2011

RMB 320,183,000 0.346 3,427,351

= RMB 265

= RMB 270

Fuel Efficiency Variance : 2011 2010 = 0.346 0.347 3,427,351 265 = 908,248(Favorable) Fuel Cost Variance : 2011 2010 2011 = 270 265 0.346 3,427,351 = 5,929,317(Unfavorable)

3. FIXED COST VARIANCE ANALYSIS

i.
Actual 2011 Fixed Operating and Maintenance

Fixed Cost Variances using Net Generation as allocation base

(i) Using Net Generation Standard Variance

39,068

33,178

5,890

(U)

Depreciation Expense

348,549

304,090

44,459

(U)

Insurance Cost

23,666

20,396

3,270

(U)

Total Fixed Costs

411,283

357,664

53,619

(U)

II. FIXED COST VARIANCES USING MINIMUM TAKE AS ALLOCATION BASE

Actual (ii) Using Minimum Take

2011

Standard

Variance

Fixed Operating and Maintenance

39,068

38,115

953

(U)

Depreciation Expense

348,549

349,342

(793)

(F)

Insurance Cost

23,666

23,432

234

(U)

Total Fixed Costs

411,283

410,889

394

(U)

THE COAL SUPPLY & THE SPUR TO PROVIDE LOWER QUALITY COAL

Increase of RMB 5 each tonne from RMB 265 in year 2010

to RMB 270 in year 2011.

Providing coal close to the low end of quality range to Luotang.

Pingdingshan has its own self-interest position in Luotang Power Company.

enable HT Power to pass over Tan and consider the management team of Pingdingshan for the role of

Executive Vice President.

THE ENVIRONMENTAL DECISIONS THAT THE MANAGER TAKES

The contractually obligated to sell electricity to HPPC according to a power purchased contract. Has limited opportunity to sell the energy above the contractual minimum. Coal supply contract with Pingdingshan. No have much option in selecting other supplier. High debt burden - approximately 80% of the initial construction costs being financed by debt. Expansion of 2,000 MW- increased the debt.

SOLUTIONS
RENEW CONTRACT WITH HPPC

having a higher minimum annual purchase per annum

want a specific quality range of coal negotiation

MAKE A NEW CONTRACT WITH PINGDINGSHAN

REPLACE WITH HYDRO AND TIDE

produces a good amount of electricity and is Eco-friendly

EXPANSION OF SUPPLIER NETWORK

JOINT VENTURE WITH HPPC

opportunity for Luotang to have high bargaining power

lightens the financial burden of Luotang

DECISION MAKING BASED ON REAL SOLID EVIDENCE

Renew contract with customer - HPPC is enjoying the privilege. (not viable) Making a new contract with existing supplier - reduce the privilege and benefits of supplier. (not viable) Replacing hyrowater and tides - cost to acquire and installing and the time taken. (not viable)

Expansion of the supplier network - high bargaining power to renegotiate the price of coal. (viable) Joint venture and having HPPC as shareholders - win-win phenomena for both parties. (viable)

CONCLUSION

Seek new supplier and have joint venture and persuade HPPC to associate for the project. Thus it will