Examination of the Corporate

Finance Practices in

Dhofar Power Company

(S.A.O.G)

Course: MBASHR-BF-100204-1

Instructor: Susanne Trimbath

Student: Latifa Said Bait Saleem

ID: 15374639
Submission date: March 31,2010
Word Count (5,367)
 TABLE OF CONTENT

EXECUTIVE SUMMARY ......... ERROR! BOOKMARK NOT DEFINED.

1.0 COMPANY BACKGROUND ............................................................. 5
1.1 COMPANY BACKGROUND ............................................................... 5
1.2 CORPORATE OBJECTIVES .............................................................. 5
1.3 ORGANIZATION OF FINANCE DIVISION .................................... 6
1.4 SHAREHOLDERS ANALYSIS ............................................................ 6
1.5 SOURCES OF FINANCE...................................................................... 6
1.6 AGENCY PROBLEMS AND CONTROL .......................................... 7
2.0 RISK ......................................................................................................... 7
2.0.1 RISK FACING DPC............................................................................ 7
2.0.1.1 DPC SYSTEMATIC RISK .............................................................. 8
2.0.1.2 DPC UNSYSTEMATIC RISK ........................................................ 8
2.1 RETURN AND COST OF CAPITAL .................................................. 9
2.1.1 MEASURING DPC RETURN ........................................................... 9
2.1.2 DPC RETURN TREND ...................................................................... 9
2.1.3 DPC WACC.......................................................................................... 9
3. CAPITAL STRUCTURE ....................................................................... 10
3.1.1 DPC CAPITAL STRUCTURE ........................................................ 10
3.1.2. EQUITY HISTORY ......................................................................... 10
3.1.3 DPC LEVERAGE .............................................................................. 11
3.1.4 IMPLICATIONS FOR EQUITY SHAREHOLDERS .................. 11
3.1.5 RIVALS CAPITAL STRUCTURE ................................................. 12
3.2 DIVIDENDS .......................................................................................... 13
3.2.1 DIVIDENDS POLICY ...................................................................... 13
3.2.2 COMPARISON WITH RIVAL DIVIDENDS ................................ 14
4. WORKING CAPITAL........................................................................ 14
4.1. WORKING CAPITAL DEFINITION .............................................. 14

2
4.2 DPC WORKING CAPITAL COMPONENT .................................... 14
4.2.1 CURRENT ASSETS.......................................................................... 14
4.2.2 CURRENT LIABILITIES ................................................................ 15
4.3 DPC WORKING CAPITAL TREND AND INTERPRETATION . 15
4.4 CASH CYCLE ...................................................................................... 16
4.5 DPC AND RIVALS .............................................................................. 17
4.6 MONEY MARKET .............................................................................. 17
5. CONCLUSION ....................................................................................... 17
5.1 AGENCY THEORY AND CORPORATE GOVERNANCE .......... 17
5.1.1 AGENCY THEORY .......................................................................... 17
5.1.2 CORPORATE GOVERNANCE ...................................................... 18
5.2 THEORY OF CAPITAL STRUCTURE AND COST OF CAPITAL
....................................................................................................................... 18
5.3 THEORY OF DIVIDEND POLICY................................................... 19
5.4 EFFECTIVE WORKING CAPITAL MANAGEMENT ................. 19
5.5 CAPITAL MARKET EFFICIENCY AND IMPACT ON SHARE
PRICE OF THE COMPANY .................................................................... 19
APPENDIXES ............................................................................................. 21
APPENDIX D .............................................................................................. 24
APPENDIX E .............................................................................................. 25
APPENDIX F .............................................................................................. 26
APPENDIX G .............................................................................................. 27
APPENDIX H .............................................................................................. 28
APPENDIX I ............................................................................................... 29
APPENDIX J ............................................................................................... 30
APPENDIX K .............................................................................................. 31
APPENDIX L .............................................................................................. 32
APPENDIX M: ............................................................................................ 33
APPENDIX O: ............................................................................................ 34

3
Executive Summary
This report between your hands have been written to examine the corporate finance
practices in Dhofar power company –DPC- (SAOG). DPC is listed in the stock market in
which initiate a more efficient financial practice, which compose a good environment for
studying financial theories.
This reports will shed the light on the financial performance of Dhofar Power Company
(SAOG) . The report will move forward to cover several aspect of the corporate finance
in DPC, industry and its rivals which have been presented in the coming five chapters.
The first chapter of this report takes chance to depict the company background, objectives
and highlights some important points about the company source of finance and the
corporate governance practiced in the company. In addition the report presents the
possible agency problem that DPC might face and best method to avoid such clashed and
problems.
The second chapter of this paper highlight the type of risk that might face the company
internally and externally and hazard its well being. In addition the second chapter give a
clear picture about the company cost of capital and return which will present a key for the
following sections of the report.
In the subsequent chapters – chapter three- the report introduces a clear presentation of
the company’s Capital structure in which the report shows the company’s WACC and its
interpretation along with the findings. Since DPC is leveraged company the report study
its history and Cost of capital in as its shows the full picture of the funding process in the
company. Additionally the report mentioned the Dividend policy that DPC used to satisfy
its shareholders.
Chapter four of this report have summarized the company working capital and other
ratios that highlight the company operational status. Through this chapter some problems
and recommendation have been raised due to the analysis of the company operational
working capital and other calculated ratios.
The last chapter of this report create a comprehensive conclusion and recommendation in
which the company can get use of to improve its performance among its rivals in the
market. Moreover, its depict the capital market efficiency and its impact of the company
share price.

4
1.0 Company Background

1.1 Company background

Dhofar Power Company DPC (SAOG) started its operation as closed joint company on
Feb 25, 2001 on the power and utilities industry. DPC have been converted to (SAOG)
which is a company subsequent to initial public offering in May8, 2005. On May1, 2003
DPC become a parent company to Dhofar generating company (SAOG) which is the
subsidiary company (Anon, 2009). The group DPC and Dhofar generating company start
commencing its commercial operation since the day of its inception May1, 2003, with a
generation capacity of 242 megawatts and high voltage transmission. The group major
owners are the Electricity holding company (SAOG) with 82.92% of the company
preference share. The Company board of directors consist of Mr. Hamoud Bin Ibrahim
Bin Soomar Al Zadjali (Chairman) and Habib Hussein (Vice Chairmail) to see the full
hierarchy of the owner checks [Appendix A] (Zawaya, 2010a). The company has one
branch that is located in Salalah city south the sultanate. The company maintains 45.5%
of Omani staff out of 109 total staff –Omani and non Omani- which is a compatible
percentage with what have been requested by the Ministry of Manpower in the Sultanate
(Zawaya, 2005b).The major business line of the company is the fossil fuel generation,
transmission and distribution of electricity in Salalah city. The group granted a
concession agreement by the Omani government. The main purpose of the grant is to
support the group to generate, transmit distribute and supply electricity in the region
through building and taking over the exited assets. Under the term of the government
agreement the group is eligible to sell natural gas as the company is leading its business
from its power station that contain six gas turbines (Anon,2010a).

1.2 Corporate Objectives

The company is working with clear standard to ensure the highest safety in the provided
services. The company main concern is the stakeholders as the company objective is
designed to direct the company vision towards providing the customer and the
environment with top of range service. The company is dumping a lot of funds as will be
illustrated in the coming section of this report and that’s funds are used to improve and
upgrade the provided service. Although, the company is concerning about its
stakeholders but its satisfying its shareholders with gaining high profit and distributing
dividend of RO 1,576,160 at the rate of 8% per share which increase the shareholder
satisfaction. The company is yielding high return to its owner which creates a balance
atmosphere in the company environment between its stakeholders and stockholders.

5
1.3 Organization of Finance Division
The finance department is directly observed by the chief financial officer that is
supervised by the accounts director. The chief financial officer and the account director
are having totally different but aligned duties that support enhancing the workflow in the
department. The hierarchy is needed to extend to achieve the main target of the company.
The Finance department hierarchy as depicted in [Appendix B] are consist of chief
financial officer who is managing several accountants. In order to create sort of specialty
in the services provided the company should divided the finance department to sections
such as account payable, budgeting, account receivables and general accounts. The
purpose of the added division is to help the financial officer to utilize the maximum of the
staff experience in the different financial fields to achieve the management requirement.

1.4 Shareholders Analysis

The company preference share have a right of two vote per share at any general meeting
while the ordinary share have the right to one vote in the meeting. As per the financial
statement issued on September 2009 Electricity holding Co. own 82.92% of the company
preference stock after acquiring the 70.77% that have been owned by Salalah power
holding prior to 19 July 2009 as illustrated in the below table.

Major Stockholder 30 Sep 2009 30 Sep 2008

No of Shares held % No of Shares %
(Preference) held
(Preference)
Electricity Holding Co SAOC 10,619,378 82.92 - -
(Oman)
Salalah Power Holding Ltd- - - 9,062,920 70.77
(Bermuda)

Electricity holding Co dominate the major shares of the company and the remaining
shares are owned by individuals and other companies.

1.5 Sources of finance

The company had a concession agreement with the sultanate of Oman government that
give the company the right to run the electrical supply project in the region. When the
concession agreement will be expired after 20 years the government will transfer the
project assets ownership to the Ministry of Housing, Electricity and Water (MHEW) and
reimburse the company with R.O 5.2m for the taken assets. Under the umbrella of this
agreement the government is paying the company a fixed amount of money as allowance
for running the project which considers a source of finance to the company operation. In
addition to the government grant the company is financing it project through having long
term loan from Calyon Credit Agricole CIB which was about R.O 8.2 m with 6.72%

6
interest rate. In addition the company is financing its operation through having overdraft
from commercial bank which was about R.O 3 m with 6% interest rate.
The company has 26,000,000 shares that have been authorized and 19,702,000 shares
issued and fully paid-up capital. There is no share premium or any financing leases in
DPC.

1.6 Agency Problems and Control

In order to keep the whole matter within the right track that company is following strict
corporate governance rules. The first step was to ensure that the whole board director’s
members are independent person who have reasonable power. In addition the directors
have good technical experience and are satisfied with the offered scheme. The executive
committee builds guidance to the executive manger to protect the utilization of the
company authority and resources. In addition the audit committee is playing a major
internal role to control the whole process. Moreover, Price Water House as external
auditor is creating an external power that ensures the quality and transparency of the
company operation. This internal and external control is controlling any conflict that may
rise between the management and board of directors which represent the agency problem
(Zawaya, 2005b).

2.0 Risk
The risk measurement, management and control become a major topic in the world of
finance and regulation. The importance of risk has been increased since the collapse of
the Long term capital management in 1998. Frank H. Knight developed the famous
economics definition for risk and differentiates it for uncertainty in his book. He defines
the risk as outcomes that can be insured against and uncertainty to outcomes that cannot
be insured against “(Brooke, 2007). Based on the famous definition of Knight there were
several definition and theories have been built about the term “risk”. Risk is known as
external and internal threat of probability of having negative occurrence that will affect
the company return and investment. This probability of having risk can be controlled or
avoid through taking well designed action. The financial risk is the probability of having
low return for the company investment.
The major type of risk is the systematic and unsystematic. The systematic risk is type of
risk that affect the whole economic such as the serious dieses like swine flu and inflation
while the unsystematic is mainly risk usually hit part of the economic such as political
situation in certain country

2.0.1 Risk facing DPC

DPC is facing several risks that are either systematic or unsystematic. Most of those risks
have been managed by the company management. The coming few sentences will depicts
most of the risk that DPC faced during its operation in the market.

7
2.0.1.1 DPC Systematic Risk
DPC face some of the risk that is not just hitting the electricity industry but its affect the
whole Omani and international world of economic. This type of risk is what have been
defined as systematic risk as its spread all over the economic world and affect all
industries in the market. The following are the systematic risk that DPC are exposing too
(Al Khalili et al.,2005):

 DPC is exposing to the inflation risk. This macro economic risk had affected the
whole Omani market. The inflation rate in Oman jumped dramatically from –
0.5% in 2003 till 12.5% in 2009 [Appendix C] (CIA, 2009). This leads to a
fluctuation in the Omani company demand and supply.
 DPC expose to exchange rate risk.
 DPC expose to interest rate risk
 The un-availability of gas and fuel oil might hamper DPC operation since the gas
and fuel oil is the main tool for DPC operation.

2.0.1.2 DPC Unsystematic Risk

There are a lot of unsystematic risk which is listed in the points below:

 DPC is exposes to construction risk which consider a prime risk for the power
plant. Generally the power plants are facing construction challenge that creates a
risk on the running business. The company manages this risk through supplying
the construction project with the full requirement and sources of human capital
and material which lead in finalizing the project on time and avoid any
construction risk. DPC project delivered the power on the time agreed on, on its
contract with government.
 Revenue risk that is originally divided to three risks which are the demand risk,
price and payment risk. (1) DPC will receive a fixed allowance from the
government based on the availability of the running system which represents the
demand risk. (2) DPC the allowance will be paid to the company by the
government for 20 year which creates a price risk. (3) At the end of the DPC
contract with the government the company should receive a payment from the
Ministry of Housing, Electricity and Water (MHEW) which will be a payment
risk for DPC.
 DPC might face a risk of being penalized for power outages. Those should be
considering by the company to treat the matter carefully and avoid any risk. It
happened before that there was an outage on the DPC system. In order to avoid
this risk the company maintains specific outage provision in its contact with
government to avoid future penalties.

8
2.1 Return and Cost of Capital
Generally speaking the Cost of capital is stand for the cost of financing the company debt
and equity. Adversely, return on capital is measuring the cash flow that the company will
generate from its capital. To have worthwhile project or investment the return should be
greater than the cost of capital.

2.1.1 Measuring DPC return

Referring to section 1.5 in the previous chapter the company source of finance which is a
combination of debt and equity as following:

1. Long term loan of R.O 78,843 m with 6.72%. Which have a cost of capital of
6.72% [Appendix D]
2. Preference shares 12,806,300 share, R.O 1. DPC preference shares have a cost of
capital of 10% Appendix E]
3. Ordinary shares 6,895,700 share , R.O 1. The ordinary share have a cost of
capital of 8.5% [Appendix E]

2.1.2 DPC return trend

DPC shares are performing well in the market. Especially with the good effort that the
company spending to improve and develop its service on the electricity market. Appendix
E shows the trend of the company shares form 2007 till 2009. The share price is
fluctuated up and down in the presented period. In results the company return is
fluctuated up and down till the price per share reach 1.42 per share. As mentioned in
section 2.0.1 DPC is facing several risks which cause either material affect or immaterial
affect to the company return and share price. The fluctuation in the return is raised
because of several risks and condition that face DPC business.

Return on Equity (for three year as accessible by the stock market)

Year 2006 2007 2008

Net Income 3,208,956.00 3,535,595.00 2,949,612.00
SHE 18,152,824.00 18,857,540.00 18,689,657.00
ROE 0.18 0.19 0.16

2.1.3 DPC WACC

DPC (Weighted average Cost of Capital) WACC is equal to 8.846% [Appendix G] which
is considered the weighted average for the company source of finance. This percentage is
the minimum return that the company has to earn in its assets to be able to satisfy its

9
creditors. Appendix G shows table that is used to predict the (company return, return on
equity and check for the periodic maintenance). The table showed the return on equity
that will be received for 15 years. Tariff electricity table, are build for the purpose
showing the Concession Agreement that the government is paying fixed allowance
accordingly for it.
When comparing the WACC with the return we would find that DPC is returning around
10% while it’s costing 8.846% which depict the good performance of the company.

3. Capital Structure

3.1.1 DPC capital structure

Section 1.5 from this report has drawn the exact picture
of the company source of finance that was mainly a DPC Capital Structure
combination between the incurred debt and equity. As
per June 2009 presented balance sheet DPC has equity
of 23% and 77% debt. This shows that the majority of 23%
DPC assets are financed by debt which incurred an
amount of interest which is equal to 2118361 R.O out of
the total loan of 67,024,729 R.O. the companies might 1

be driven close to the optimal structure if they manage 2

to maintain a low cost of capital and enjoy high return.

As have been highlighted in section 2.1.3 DPC WACC
77%
is 8.846%. With the given WACC if we calculate the
company value that might give a clear picture about the
probability of the optimal structure existence. With the
current used WACC of 8.846% the company value will be about R.O 11,330,545
[Appendix J]. In the current situation the company can be considered on moderate
optimal structure which is leading to high return. It’s known that the optimal structure
can be achieved through driving the cost of capital down and increase the incurred return
which still needs to be achieved by the company as the debt is high compared to the
equity. This doesn’t mean that financially DPC is in good financial shape but that doesn’t
necessarily mean that it reach the optimum. In addition having 77% of debt turn on the
risk alert, in which DPC should be careful about in the future.

3.1.2. Equity History

Based on the DPC financial statement – statement of change in equity- the company
didn’t issue new share since its inceptions. The total equity (ordinary and preferred stock)
is 19,702,000 R.O which have been incurred as 19,702,000 shares @ rate of 1 R.O per
share. The break down of the issued share is as the following:

 Ordinary shares 6,895,700

 Preferred shares 12,806,300
 Total Equity 19,702,000

10
3.1.3 DPC leverage
With 77% debt DPC considered to be Leverage Company because most of its assets are
financed by debt. The DPC debit to equity ratio [Appendix K] is measuring the company
financial leverage which can be computed by dividing the company long term debt by the
equity. The debit/equity ratio is measuring the company ability to borrow and repay the
money. The debit to equity ratio table below depict that the company ability to borrow
and repay its loans is decreasing from 2003 till 2009. This resulted from the huge
percentage of debt that the company is taken. With the existence of 77% debt in the
company capital structure that’s mean that the company is facing risk, as the borrower
has right on the company assets in case of shortage in liquidity.

Table 3.1 (Change is Capital structure)

2009 2008 2007 2006

Equity 19,702,000 19,702,000 19,702,000 19,702,000
Debit 67,024,729 62,735,117 59,718,879 63,408,857
Total 86,726,729 82,437,117 79,420,879 83,110,857
Equity % 23% 24% 25% 24%
Debit % 77% 76% 75% 76%

Table 3.1 reflects the changes that face the company capital structure. The trend shows
that there were no change in the company equity and the whole change have been done in
the debt slice which is increasing by taking more debt to finance the company operation
and assets. The finding states that the company is becoming more leverage due to
increase in its debt from 2006 to 2009 by 3,615,872 R.O. This increase in debt will lead
to increase in the gearing as gearing and risk have positive relation with the debt.

3.1.4 Implications for equity shareholders

Stock holders and bondholders are always having an interesting relation. This relation
caused a lot of theory and practices that reflect the reality of the relation. When the
bondholders are enjoying receiving their interest and having priority to their money in the
liquidity stage the shareholders will be suffering from facing the risk alone. Although
increasing the debt portion help in enjoying high firm value due to tax shield but the
company might face risk of bankruptcy that may result from shortage of meeting
obligation. The agency cost conflicts have been resulted between the bondholders and
shareholders which the latest use to be able to enjoy some of the privilege that the
bondholders have. The all equity company is facing lesser headache than the leverage
company as stated in the in Miller and Modigliani’s theory about capital structure.

11
3.1.5 Rivals capital structure
Dhofar Power Company has many rivals in the market that are working in different
region but in the same field who are “AES Barka, Al Kamil Power Co and United Power
and Sohar Power Company”(Bankmuscat,2008) [Appendix L].

Figure 3.1

Rival Comparison

100%
80%
60% Series1
40% Series2
20%
0%
AES Barka Al Kamil United Sohar DPC SAOG
SAOG SAOG Power Power
SAOG SAOG

* Equity
* Debit
Figure 3.1 compare DPC capital structure with its rivals in the same industry all of them
are leverage companies but the only one that still dominant more equity than debt is
United power SAOG other than that most of the companies in the field are financed
through high percentage of debt.

12
3.2 Dividends

3.2.1 Dividends policy

The dividends are paid to the shareholders from the company earning after covering the
company obligation. Usually after issuing the financial report the board of director in
their ordinary meeting is taken decision of the percentage, amount and period for the
dividends to be paid. DPC is paying yearly dividends –starting 2005- to its investors
(Figure 3.2) which is shown the amount of dividends that the company was paying for
five years.

Figure 3.2

(Corporate information,2010)

The reason behind distributing dividends is to satisfy the stockholders. The company is
applying the policy of paying “little dividends or no” and consider it to be the more
favorable policy. The company is distributing few dividends to the investor to incur
privilege to the investor and to motivate other investors to invest in the company. I think
that the dividends policy is irrelevant as the investor can create their own dividends that
tight the company to spend the incur obligation.

Figure 3.3

(Al Khalili et al.,2005)

13
3.2.2 Comparison with rival dividends

(Al Khalili et al., 2005)

The major competitor for DPC is United power comparatively to DPC is paying the
highest rate of dividends compared to its rivals as per 2009 presented data.

4. Working Capital

4.1. Working capital definition

The working capital term represent the company operating liquidity that is available from
running the company operation. The working capital can be derived through the
following formula:

Working capital = Current assets – Current Liabilities

The purpose of computing the work in capital is to ensure that the companies have
sufficient liquidity to fund its operation activities. Companies with positive working
capital have the privilege to enjoy reasonable amount of liquidity to finance its operation
transactions. The working capital can be monitor through controlling the company
inventories, account receivables, account payable and cash.

4.2 DPC Working capital component

4.2.1 Current assets

* Inventories; The company have total inventory of R.O 4,579,142 as of Dec.09. The
company inventories are recorded based on lowest cost and net realizable value. The
company inventories cost is based on the weighted average method, the total inventories
cost includes the expenditure that incur to acquire the inventories and delivering it’s to
the desired location.

* Receivables; the balance sheet shows total receivables of R.O 9,680,936 as of Dec.09.
The companies have two sole receivables that share the company receivables. Those

14
companies are OPWP and ONEIC in where the latest have R.O 3,156,855 and the reset
should be covered by OPWP.

* Advance and prepayments; the company advances and prepayment shows a total of
R.O 387,186 as of Dec.09.

* Cash and bank balance; the company cash and bank balance of R.O 1,030,651 as of
Dec.09. The bank deposits form 99% from the whole part of the cash and bank balance.
The deposits held in the bank with interest rate ranging from 0.25% to 2.5% per annum.

4.2.2 Current liabilities

* Bank Overdraft; the company have an amount of overdraft with approximately R.O
456,116. The company takes an overdraft of 3 million from the bank with interest rate
that are ranging from 6% to 8.5% per annum.

* Current maturities of the term loans; the company record R.O 6,254,155 as current
maturity of the term loan.

* Amount due to related parties; R.O 60,000 have been recorded as a related parties that
the company should paid the amount to.

* Payables; R.O 6,452,514 have been recorded as payables. This amount incurred to be
paid to the Ministry of Oil and Gaze for supplying fuel to the company

* Other payables and accruals; The company have total payables of R.O3,760,844.

4.3 DPC working capital trend and interpretation

As per data presented on [Appendix M] the
Working Caital trend
company have a dramatically decrease in its
working capital especially at the end of 2008. 8000000

As per [Figure A] the company current assets

have been slashed starting 2008 which indicate 6000000

that the company increases its reliance on the 4000000

Working Capital

payables source of funding starting 2008 which Series1

affect the company liquidity. Since the working 2000000
Series2

capital is the amount that the company in need for 0

to stay in business then DPC is facing critical 1 2 3 4

problem as its working capital is negative which -2000000

is mean that the company is durable to bankruptcy -4000000

if its need to paid immediate and quick amount Years

money. As result to the negative working capital

the company might goes to financial pressure which might lead to one of the following
financial interferes:

15
 - Increase on borrowing to finance the operational activities and to help the
business moving forwards.
- Late payment to creditors which might affect the company reputation or might
lead to series defect on the operation since the company had two initial suppliers
(creditors) who are mainly supplying the initial base for the company operation.
Failure to meet obligation might lead to the collapse in the company main
business activities which is supplying the region with electricity. Another
consequence to this is that creditors might not be gentle with DPC and take the
issue to the court which might resulted in bankruptcy.

Generally working capital is designed to fund the sales attraction process. If there were
less funding spent to increase and attract the company sales then this will lead to less
return on investment. When company achieve high profit margin that mean there is less
working capital are freeze in the selling process (Smith, 2000).

DPC profit margin = Net income/Net Sales

= 3,092,699/5,398,882
= 57%
The profit margin is testing the effacing in the operating cycle as its measure the
generated earning in relation to particular sales level. This is another indication that the
company is not in prefect and effective operation condition which affect its financial
health. The moderate profit margin level that DPC have indicates that most of DPC
working capital is tied in the operational selling process as clarify by Smith Chris. In the
last two years the company starts to be more over trading than before. The company have
the sign of the over trading companies as its have higher creditor and debtor with slashed
cash all over the five presented years [Appendix O] (Tatum, 2010).

Due to lack of funding the company is mainly financing its working capital through its
long term liability which creates link between the company long and short term cycle.

4.4 Cash cycle

The company is experience an increase in its cash cycle which means that the company is
having a stretched time between purchasing its products and generating its receivables
from its debaters [Appendix O]. The company should place a wise decision to manage
its working capital, operating cycle and cash cycle. The improvement in those three will
help the company enjoy less stress financial opposition, Form the whole finding in the
working capital and cash section DPC recommended to rearrange its working capital
management.

16
4.5 DPC and Rivals
AES Barka Al Kamil United Power Sohar Power
SAOG SAOG SAOG SAOG
Current assets 12,698,608 4,218,000 2,947,000 17,711,000
Current
liabilities 14,543,597 4,516,000 4,309,000 13,744,000
Working Capital -1,844,989 -298,000 -1,362,000 3,967,000
(MSM,2009)

The above table shows that most of the companies in the electrical industry are having
negative working capital. Moving to the initial competitor of DPC which is Sohar power
we can finds that its performing well as it manage to maintain positive working capital.

4.6 Money market

The only used money market instrument in Oman is the certificate of deposits
(CBO,2010). The certificate of deposit have newly presented to the Omani market and
still doesn’t practiced by many companies in the Omani different industries and its also
not affecting DPC as its clear from its financial statement.

5. Conclusion

The following chapters will draw a conclusion for the previous presented chapter’s
thoughts and ideas. Through this chapter I will introduce few recommendations to the
company in which give room for improvement in the below topics.

5.1 Agency theory and Corporate Governance

5.1.1 Agency theory

Chapter 1.6 from this paper mentioned the dilemma of the agency cost between the DPC
management and shareholders. The Agency cost is simply an economic concept that is
raised in the publicly traded company. In such companies there are costs that are incurred
from the inefficiency relation between the shareholders and the management. The agency
cost or risk existed because the management might take independent action from
shareholders for their own interest. The company shareholders can prevent them selves
from being fall in the agency cost trap through offering the management with satisfactory
package of salary and allowances to keep their eye away from the shareholders wealth
pie. To apply those thought in DPC, the DPC management are enjoying a satisfactory
package that keep them in the right track. It’s also recommended that the boards of
directors can declare a bonus to the management during the revenue peak time or in
dividends distribution period to keep the management satisfied and motivated. There are

17
other external factors that keep the company a way from falling in the agency cost which
will be covered under the corporate governance below.

5.1.2 Corporate Governance

The agency cost can be avoided through making the management happy and through
setting clear legal path for the company management to follow. This legal path can be
created through having the following factors:

- Internal Audit unit

The company has an internal audit unit that is taking care of checking and monitoring the
posted data in daily bases which minimize the possibility of error and fraud. The internal
audit unit present a quarterly repot to the board audit committee in which it’s highlight
the whole findings of discrepancies and biases if existed (Annual report, 2005).

- External Audit company

DPC have been audited by KPMG Company which is considered one of the big names in
the auditing field. KPMG take care of DPC for four years. Recently DPC is under the
microscope of Price water house which is also one of the famous names in the audit
world. Dealing with such names keeps the company far from falling in any fraud,
manipulation, corruption…etc. The company is issuing one audit financial report out of
the whole four issued report during the year. Instead being restricted to one yearly visit
Price water house is applying an interim visit audit in which it can test a sample without
giving the company management time to arrange for having this audit visit which
increases the control over the company management creditability.

- Set a clear internal guidelines and policy

The board of director creates a full manual of structure, guidelines and policy that should
guide the management and staff to the right track to reach the planned goal easily. The
audit firms and the internal auditor are taking those rules and regulation as base for
testing the honesty and creditability of the presented data by the company management
and staff.

- Follow the guidelines of the country exchange market

DPC is working in compliance with the code of corporate governance that has been
created by the Capital market Authority. This guidelines control the company
transparency with the public.

5.2 Theory of capital structure and cost of capital

Section 3.1.1 of this report shows the different theories about the capital structure and its
implication of DPC. As mentioned before that DPC assets are mostly covered by debt

18
which forms around 77% of the company total capital structure. Seeking the optimal
capital structure we can found that the company has WACC of 8.846%. With this cost
and this capital structure DPC considered to be in its way towards reaching an optimal
capital structure which will support the wealth maximization purpose. The company
management should target its goal towards driving the cost down and increasing the
return which can be achieve through applying difference policy and method to drive the
WACC below the return and gain benefit of that, which will keep the shareholders
satisfied (Brigham,Houston,2007).

5.3 Theory of dividend policy

As what have been discussed in section 3.2.1 the company is applying the policy of
dividends that stated “little dividends or no”. The company boards declared the dividends
yearly in order to keep the investors stratified and gain the attention of other investor’s.
Since DPC have a working capital of -2,000,294 as mention in section 3.2.1 which mean
that DPC is having insufficient liquidity to cover its liability to run its operation. This
information drives us to ask an important question is it wise to pay dividends with such
case of scarcity of the available fund. I would recommend DPC to stop paying dividends
till it’s maintaining acceptable level of liquidity.

5.4 Effective working capital management

Section 4.3 provides a presentation about the company working capital. It have been
highlighted that the company is having a negative working capital for two years. This can
be interpreted as insufficient fund to finance the operating liabilities which is a very
crucial matter that most of the time leads to bankruptcy. With high rate of debt DPC can
be considered that it’s increasing its debt to move the operational cycle. Failing to meet
the short term liability will drive DPC to situation were it might face its vendors in court
or having their operation cycle stopped due to vendor action of stop supplying till their
dues covered by DPC. I do recommended that DPC should analysis the situation and
create a plan for improving its working capital and maintain better rate of liquidity to
cover its operational needs (Bhattacharya, 2006).
DPC need to speed up it receivables collection process to be able to magnify its liquidity,
to create clear picture about this we will found that DPC have Days in payable of 144.87
in 2009 compared to 556.23 receivables days in the same year. This mean that DPC is
outsourcing the fund to run its operations while its much easier to create mutual benefit
by collecting the current receivables and fund the current liability.

5.5 Capital Market efficiency and impact on share price of the company
Evaluating Muscat security market (MSM) we found that it was very volatile in relation
to more stable underlying fundamentals. Without a clear data about the stock market the
investor can’t really beat MSM as the market is going in rally that consistent of a lot of
undervaluation and overvaluation. The investor can’t predict the next move of the market,

19
the correlation and the consequence which is considered risky to invest in without solid
ground (Pattanaik, Ali, 2006).

(MSM,2010)

Due to instability of the stock market DPC closing share price is having a fluctuated
movement with peak increase between the year 2007 and 2008. With this fluctuation the
investor can’t predict the future data which make the investment contrary and risky.

20
Appendixes
Appendix A

Dhofar Power Company (Board of Directors)

Hamoud Bin
Ibrahim Bin
Soomar Al
Zadjali
Chairman

Habib Hussein
Vice Chairman

Abbas Amiri Mosabbah Saif Salim Tamman Simon Morgan Glen F De Silva
Director Al Mutairy Al Maashany Director Director
Director Director

21
 Appendix B

Dhofar Power Company (Management/Finance Department )

G Loganathan
Chief Executive
Officer

S Vishawanath Sorinda Ruwi Abdulrahman Saeed Al Hadry

Accounts Director Transmission and Hussein Corporate
Distribution Generation Services Director
Director Director

Said Al Kathiri
Chief Financial
officer

Accountant

Accountant

Accountant

22
Appendix C

Inflation Rate movement in Oman from 2003 till 2009

(CIA, 2009)

(CIA, 2009)

23
Appendix D

The debit cost of capital is computed as the following formula:

Cost of debit (after corporate tax) = RB * (1-tc)

* tc is zero, the contract signed with the movement exempted the
company from paying tax.

Cost of debit (after corporate tax) = 6.72* (1-0)

= 6.72 %

24
Appendix E

(Al Khalili et al.,2005)

The costs of capital for preferred shares are calculated as following:

Cost of capital of preferred shares = Dividends/Shares market value

= (**14.3% *12,806,300)/(***1.42*12,806,300)
= (1,831,301/18,184,946) = 10%

** Dividend rate derived from table A.

*** Market price derive from (Al Khalili et al.,2005)

25
Appendix F

(Authority of electricity regulation,Oman,2005)

The company ordinary share cost of capital can be achieved by computing

Capital assets pricing model (CAPM) = **Rf + Risk premium
= 3.5% + 5% = 8.5%
Rates have been taken from Table C as the central based.

26
Appendix G

DPC Share price trends

(MSM,2010)

27
Appendix H

WACC Calculation:

Proportion
Market Value Market Cost of Contribution
Capital Source R.O Value Capital to WACC
Ordinary Shares 6,895,700 .35 6.72% 2.352%
Preferred Shares 12,806,300 .646 10% 6.46%
Debt 78,843 0.004 8.5% 0.034%
19,780,843 100 8.846%

28
Appendix I

Tariff for electricity

(Al Khalili et al.,2005)

29
Appendix J

EBIT x (1 – corporate tax) 1,002,300* x (1-0)**

---------------------------------- = ---------------------------------- = R.O 11,330,545
WACC 8.846%

*(Business week, 2010)

**As per the Concession Agreement the company is exempted from paying tax for a
period of five years. For the period ended on June 2009 the company was obliged to pay
an amount of tax 259,198 R.O which have been covered by third party “OPWP” as per
the government contract.

Equity Cost of Debt

Debt % % Geared b (pre Tax) CAPM(Eq) WACC Firm Value
R.O
77% 23% 0.9 8.5% 0.0850 0.08846 11,330,545

30
Appendix K

(Al Khalili et al.,2005)

31
Appendix L
AES Barka Al Kamil United Power Sohar Power DPC
SAOG SAOG SAOG SAOG SAOG
Equity 16,000,000.0 9625 19178 27800 19,702,000
Debit 83,173,298.0 23160 2000 153231 67,024,729
Total 99,173,298.0 32,785.0 21,178.0 181,031.0 86,726,729
Equity
% 16% 29% 91% 15% 23%
Debit % 84% 71% 9% 85% 77%

(MSM,2009)

32
Appendix M:

Elements 2006 2007 2008 2009

Current assets 16,035,300 14,758,885 13,517,696 15,677,915
Current Liabilities 9,308,943 9,920,399 16,512,682 17,678,209
Working capital 6,726,357 4,838,486 -2,994,986 -2,000,294
(MSM,2009)

Figure A
Current Liability and Current assets

20000000

15000000
Series1
Figures

10000000 Series2
Series3
5000000

0
1 2 3 4 5
Years

 Current assets
* Current liabilities

33
Appendix O:

Elements 2006 2007 2008 2009

Average inventory - 2,603,827.00 3,446,094.50 4,215,336.00
Inventory turnover - 5.50 4.71 4.03
Days in inventory - 66.42 77.46 90.47
Average Account Receivables - 4,448,205.50 5,935,201.00 8,227,389.50
Average Receivables Turnover - 2.22 1.52 0.66
Days Receivables - 164.43 240.54 556.23
Average Payables - 2,665,000.50 4,940,354.00 6,750,266.00
Account Payable Deferral
Period - 5.37 3.29 2.52
Days in Payables - 67.98 111.05 144.87
Operating Cycle - 230.85 318.01 646.70
Cash Cycle - 162.87 206.95 501.82

Calculation bases
2006 2007 2008 2009
Inventory 2,166,995 3,040,659 3,851,530 4,579,142
COGS 15,484,177 14,308,924 16,237,338 17,006,714
AR 3,799,852 5,096,559 6,773,843 9,680,936
Credit
Sales 9,454,651 9,873,854 9,006,138 5,398,882
Payables 2,497,311 2,832,690 7,048,018 6,452,514
Cash 9,497,440 6,102,420 1,724,577 1,030,651

34
Reference
Anon.(2010a).”Dhofar Power Company”.[Online].Available from:
http://www.google.com/finance?q=MSM:DHPS. (Accessed: February17, 2010)

Anon.(2009).” notes to the financial statements for the six months period ended 30 June
2009”.[Online].Available from:
http://www.msm.gov.om//pages/default.aspx?c=251&id=320&st=1. (Accessed:
February17, 2010)

Anon.(2009).” notes to the financial statements for the six months period ended 30 June
2009”.[Online].Available from:
http://www.msm.gov.om//pages/default.aspx?c=251&id=320&st=1. (Accessed:
February17, 2010)

Annual report.(2005).”Annual report for shareholders”.[Online].Available from:

http://www.docstoc.com/docs/27976793/DHOFAR-POWER-COMPANY-S. (Accessed;
March24,2010)

Authority of electricity regulation, Oman (2005).”Annual Report”.[Online].Abalaible

from: http://www.aer-oman.org/pdf/AnnualReport2005(English).pdf. (Accessed:
February 24, 2010)

BankMusact.(2008).”Sohar power company SAOG”.[Online].Available from:

http://www.soharpower.com/IPO%20Highlights.pdf. (Accessed March 10,2010)

Bhattacharya,H.(2006).”Working capital management, strategies and techniques”.

Google book.[Online].Available from:
http://books.google.com/books?id=A99JYhY1c9sC&printsec=frontcover&dq=working+
capital+management&hl=ar&cd=1#v=onepage&q=&f=false. (Accessed; March24,2010)

Brigham.E, Houston.J.(2007).”Fundamentals of financial management”. Google

book.[Online].Available from:
http://books.google.com/books?id=hr1x40H0nzYC&pg=PA442&dq=theory+of+capital+
structure&hl=ar&cd=3#v=onepage&q=theory%20of%20capital%20structure&f=false.
(Accessed; March24,2010)

Brooke.G.” Risk, Uncertainty and Profit: Frank Knight's Contribution

Reconsidered”.[Online].Available from: https://editorialexpress.com/cgi-
bin/conference/download.cgi?db_name=NZAE2007&paper_id=17. (Accessed: February
24, 2010)

35
Busieness week.(2010).”Dhofar power company”.[Online].Available from:
http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=DHPS
:OM. (Accessed March10,2010)

CBO.(2010).”CBO certificate of Deposit issue results”.[Online].Available from:

http://www.cbo-oman.org/dep_reslt.htm. (Accessed: March17,2010)

CIA.(2009).”Oman inflation rate (Consumer prices)”.[Online].Available form:

http://www.indexmundi.com/oman/inflation_rate_(consumer_prices).html. (Accessed:
February 24, 2010)

Corporate information.(2010).”Dhofar Power Compan.[Online].Avalaible from:

http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C5825ZRT0.
(Accessed March 10,2010)

Khalili,F., Al Yahmadi.K, Jersani.R.,Al Musalti.R.,Al Mamari.O.,Al Balushi.N.

(2005)”Dhofar power Co”.[Online].Available from:
http://ae.zawya.com/researchreports/madina/DhofarPower(IPO)Research.pdf(Accessed:
February 24,.

Muscat security market (MSM).(2009).”Balance sheet report”.[Online].Avaliable at:

http://www.msm.gov.om//pages/default.aspx?c=251&id=371&st=1. (Accessed
March10,2010)

Muscat security market (MSM).(2010).”Closing Price”.[Online].Available at:

http://www.msm.gov.om//pages/default.aspx?c=251&id=371&st=1. (Accessed March
24,2010)

Pattanaik, S.Ali,A.(2006).”MSM and the efficient market hypothesis: an empirical

assessment”.[Online].Available from: http://www.cbo-
oman.org/OccasionalPapers/MSM.pdf. (Accessed:20 March 2010)

Smith,C.(2000).”Working Capital Management”.[Online].Available from:

http://www.osi.hu/cpd/policyresources/fmbp/chapter_06_page1_fmbp.html. (Accessed:
March17,2010)

Tatum,M.(2010),”What is overtrading”.[Online].Available from:

http://www.wisegeek.com/what-is-overtrading.htm. (Accessed: March 17,201)

Zawaya.(2010a).”Dhofar Power Company”.[Online].Available from:

http://www.zawya.com/cm/profile.cfm/cid1000183. (Accessed: February17, 2010)

36
Zawaya.(2005b).”Dhofar Power Company Annual report for
Shareholders”.[Online].Available from:
http://ae.zawya.com/cm/financials/1000183_20051231_12_A_.doc. (Accessed:
February17, 2010)

37