Management Discussion and Analysis Forward looking statements Statements in this Management Discussion and Analysis of Financial Condition and Results of Operations of the Company describing the Company's objectives, expectations or brdictions may be forward looking within the meaning of applicable securities laws and regulations. Forward looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The Company assumes no responsibility to publicly amend, modify or revise forward-looking statements, on the basis of any subsequent developments, information or events. Actual results may differ materially from those exbrssed in the statement. Important factors that could influence the Company's operations include cost of fuel, determination of tariff and such other charges and levies by the regulatory authority, changes in government regulations, tax laws, economic developments within the Country and such other factors. The financial statements are brpared under historical cost convention, on accrual basis of accounting, and in accordance with the provisions of the Companies Act, 2013 (the Act) and comply with the accounting standards notified under Section 211 (3C) of the Act read with Companies (Accounting Standards) Rules, 2006. The management of Reliance Power Limited ("Reliance Power" or "the Company") has used estimates and judgments relating to the financial statements on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner, the state of affairs and profit for the year. The following discussions on our financial condition and result of operations should be read together with our audited consolidated financial statements and the notes to these statements included in the Annual Report. Unless otherwise specified or the context otherwise requires, all references herein to "we", "us", "our", "the Company", "Reliance" or "Reliance Power" are to Reliance Power Limited and/or its subsidiary Companies. Economic Outlook The Indian Economy is estimated to have grown at a rate of 7.4 per cent during the year 2014-15. Indian Economy's return to the high-growth path has been a result of a number of factors such as lower fiscal and Current Account deficits, falling inflation, falling commodity prices and structural reforms to boost investments. Reform measures like de-regulation of diesel price, direct transfer of subsidy on national scale, reform of the coal sector through auctioning of coal blocks, increasing the FDI ceiling in defence have acted as a catalyst to ensure achievement of the targeted GDP growth rate. Power Sector As is widely acknowledged, there is a very high degree of correlation between power sector growth and economic growth. Therefore it is imperative that power sector needs to grow for sustainable economic growth. India's electricity generation touched the 1 trillion units mark during 2014-15 for the first time, registering a growth of 8.4 per cent compared to 6 per cent in 2013-14. Due to huge capacity addition along with higher generation and improved transmission capacity, the electrical energy shortage reduced to 3.6 per cent from 7 - 11 percent during the last two decades. A number of issues have been impacting the sector such as availability of fuel, delays in approvals and clearances, financial condition of distribution companies and others. However, the current government which came into power with a strong mandate at the beginning of fiscal year 2014-15, has taken several positive steps to address these issues. The Electricity (Amendment) Bill 2014 has been introduced ushering in next-gen reforms in the power sector, steps have been taken to augment domestic coal production. Liquified Natural Gas (LNG) has been alloted through a bidding process and steps have also been taken by the government for expediting various clearances and intensive monitoring of project implementation is being done. Installed generation capacity The total installed power generation capacity of India as on March 31, 2015 was 267 GW, of which over 36 per cent is contributed by the private sector. India added generation capacity of 22,566 MW in FY 2014-15, a 27 per cent increase over capacity addition in FY 2013-14. The private sector was the biggest contributor accounting for 59 percent of the total capacity added in FY 2014-15. India has been traditionally dependent on thermal power as a source of power generation, which constitutes about 71 per cent of the current capacity. The balance is contributed by hydroelectric power (15 per cent), nuclear (2 per cent), and renewable energy (12 per cent). With over three-fourth of the capacity added last year coming from coal based projects and with the capacities under construction being biased towards coal based projects, India is expected to continue to remain reliant on coal for achieving its power needs. Consequently, shortage of coal rebrsents the biggest impediment for power generation in India. Power generation The total power generation in India during FY 2014-15 was 1,048 billion units 8.4 per cent higher than the one achieved in FY 2013-14 and was 2.5 percent higher than the target estimates set for FY 2014-15. Power Sector Outlook Demand and supply outlook The year 2014-15 turned out to be a better year for the Indian economy with GDP growth rate expected at 7.4 percent compared to 6.9 percent in 2013-14. The expected high growth is due to a number of reforms that have already been undertaken and more that are being planned for. Energy deficit came down to 3.6 per cent as compared to 4.2 per cent in FY 2013-14 and peak deficit also fell to 4.7 per cent in FY 2014-15. However, with the revival of the economy, demand for power is likely to increase from the current levels. The long-term demand outlook for power therefore is quite optimistic. The following chart highlights the deficit situation in the last few years: Opportunities and threats The Government has been taking a number of policy initiatives to attract investments in power sector. One of the key initiatives of the government has been to promote setting up of Renewable Energy capacity. The Government of India has announced an ambitious target of creating 1,75,000 MW of renewable energy capacity by the year 2022. Out of this nearly 1,00,000 MW is planned to be Solar power. Renewable power generation therefore provides a significant opportunity for growth in the power sector. The government is also focussed on opening up of coal mining sector for private participation. In this regard it has already passed the Coal Mines (Special Provisions) Act 2015, under which coal mines can be allocated to beneficiaries through a transparent bidding process. Allocation of 29 coal mine blocks has been successfully done through the bidding process. More coal mine blocks are likely to be put up for auctioning in the future, providing an opportunity for players in the sector to secure fuel for their power plants. Key risks and concerns Power sector is a highly capital intensive business with long gestation periods before commencement of revenue streams. Coal based power projects have development and construction period of 7-8 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 Company monitors the external environment and manages its internal environment to mitigate the concerns on a continuous basis. Some of the key concerns being faced by the sector currently are: 1. Coal supply position Almost 60 per cent of India's generation capacity is coal based. According to the Integrated Energy Policy, by FY 2031-32, India would require 2,040 million tonnes of coal for power generation, more than five times its current consumption levels. The shortage of coal is so acute that many of the power plants have to depend upon imported coal for meeting a significant portion of their coal requirements. The total imported non coking coal quantity has increased more than three times within the last five years and may go up further due to the continuing shortage in domestic coal availability. There is an urgent need to augment domestic coal availability to mitigate the brsent problems being faced by the generating companies. 2. Gas availability position Natural gas production in the Country has been falling continuously over the last few years. This has seriously impacted the viability of existing as well as upcoming gas based power plants. The government is trying to resolve the problems faced by these projects. 3. Weak financial condition of electricity distribution Companies The financial health of electricity Distribution Companies (Discoms) is another area of concern threatening the very viability of the power sector. The inability of Discoms to generate adequate resources is affecting their ability to make capital investment in enhancing and improving distribution networks so that they operate efficiently. This is resulting in high Aggregate Technical and Commercial (AT&C) losses of the utilities. Also, losses of the utilities are mounting with increasing power purchase costs without commensurate increase in tariffs. The government has been taking policy measures to improve the condition of the distribution sector including making changes in the Electricity Act. 4. Execution risk Power projects are highly capital intensive and have a long development and construction phase thus exposing them to various macroeconomic as well as project specific risks. During the development phase, a project faces the following key risks: • Delays in statutory approvals and clearances from the authorities • Delays in land acquisition • Non-availability or delays in obtaining fuel, water and transmission linkages • Availability and cost of capital - both equity and debt funding During the construction stage which covers the period from the commencement of construction till the commissioning of projects, the key risks that need to be monitored are: • Delays leading to time over-runs • Increase in project costs leading to cost over-runs • Challenges in transportation/logistics of equipment • Hydrological and geological risks in case of hydroelectric projects During the construction phase, ensuring that all the supply and erection contracts are placed on time and within the cost estimates is a critical challenge and thereafter ensuring that all the vendors and contractors perform their responsibilities as envisaged is a key risk. Internal control systems and their adequacy The 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 in the Company. The system has control processes designed to take care of various control and audit requirements. In addition, the Company has a robust Internal Audit process, 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 audit team is supported by reputed audit firms to undertake the exercise of Internal Audit at various project locations. The report of the Internal Auditors is placed at the Audit Committee Meetings of the Board. The Company has also put in place a Risk Management Framework, both at the corporate as well as at the project level, which provides a process of identifying, assessing, monitoring, reporting and mitigating various risks at all levels at periodic intervals. The Risk Management process is supervised by the Risk Management Committee of the Board. The above Committee has been constituted in line with the requirements of clause 49 of the Listing Agreement with Stock Exchanges. The Committee undertakes a review of the risks as well as the status of the mitigation plans on a quarterly basis. Discussion on Operations of the Company The Company is in the business of setting up and operating power projects and in the development of coal mines associated with such projects. The Company has identified a large portfolio of power projects and is also developing coal mines. Reliance Power's vision is to become one of the largest integrated power generation and coal resources company. Of the power projects which the Company is developing, some are operational while the other power projects are under various stages of development. i. Sasan Ultra Mega Power Project, a 3,960 MW pithead coal-based Project in Madhya Pradesh The 3,960 MW Sasan Ultra Mega Power Project (UMPP) is fully operational. The project also has associated coal mines and coal production from these mines has already commenced. The power generated from Sasan UMPP is sold to fourteen distribution companies in seven states under the Long-term Power Purchase Agreement (PPA). ii. Rosa, a 1,200 MW coal-based power project in Uttar Pradesh The Rosa power plant completed another year with excellent operational and financial performance. In its third year of operations, the plant generated 8592 million units of electricity. The entire electricity generated from the project is sold to Uttar Pradesh on a regulated tariff basis. iii. Butibori, a 600 MW coal-based power project in Maharashtra The 600 MW Butibori power plant in Nagpur, Maharashtra is fully operational and is supplying power under the Long Term Power purchase agreement approved by Maharashtra Electricity Regulatory Commission (MERC). iv. Vashpet, 45 MW wind farm in Maharashtra Reliance Power has set up a 45 MW Wind farm in Sangli district of Maharashtra. During FY 2014-15 the project generated 79 million units of electricity. v. Dhursar, a 40 MW Solar Photovoltaic (PV) power project in Rajasthan Dhursar Solar Power Private Limited has set up a 40 MW Solar PV Plant in Jaisalmer district of Rajasthan. Electricity from this project is sold under a PPA for a period of 25 years. During FY 2014-15, project generated 72 Million Units of electricity. vi. 100 MW Solar CSP in Rajasthan Rajasthan Sun Technique Energy Private Limited (RSTEPL),a wholly-owned subsidiary, has commissioned the 100 MW Concentrated Solar Power Project (CSP) in Jaisalmer, Rajasthan. vii. Krishnapatnam Ultra Mega Power Project, a 3,960 MW imported coal-based Project in Andhra Pradesh Coastal Andhra Power Limited (CAPL), a wholly owned subsidiary of the Company is developing the project. Reliance Power was awarded the Krishnapatnam project following an International Competitive Bidding process and it will be selling power to 11 procurers comprising five states. However, the project is facing issues consequent upon changes in regulations in Indonesia from where coal was intended to be imported for the Project. The Company had issued notice to the procurers for an amicable resolution of the issues under the Power Purchase Agreement (PPA). Since the procurers did not respond to the notice for dispute resolution, the Company has raised a dispute. The procurers on the other hand have initiated the process for terminating the PPA against which the Company is pursuing its appeal in the Delhi High Court and the matter is sub-judice. The Company has also referred the dispute regarding validity of termination notice issued by the procurers to the Indian Council of Arbitration. The Company has also filed a petition before the Central Electricity Regulatory Commission seeking appropriate relief without brjudice to the proceedings pending before the Delhi High Court and the arbitration process already initiated. viii. 3,960 MW coal-based power project in Madhya Pradesh Chitrangi Power Private Limited (CPPL), a wholly owned subsidiary of Reliance Power, has plans to develop a 3,960 MW coal-based power project at Madhya Pradesh. The Company intends to sell the power generated from this project through long term contracts. ix. Samalkot Power Project, a 2,400 MW gas based project, in Andhra Pradesh The Company is implementing the 2,400 MW Samalkot project in Andhra Pradesh. The project is awaiting allocation of gas from the government for generating power. x. Tilaiya Ultra Mega Power Project, a 3,960 MW Pithead Coal based project in Jharkhand The Company has issued a notice for terminating the PPA upon the Power Procurers on account of their failure to fulfill the conditions subsequent as per the PPA entered into by the Company with them. xi. Hydroelectric Power Projects The Company is developing various hydroelectric power projects located in Arunachal Pradesh, Himachal Pradesh and Uttarakhand. These projects are in different stages of development. Hydroelectric power projects by nature have long gestation periods and require clearances from various authorities before commencement of construction activities. Some of these projects have achieved significant milestones and are likely to be developed in the next few years. Coal Mines The Company has been allocated coal mines in India along with the Ultra Mega Power Projects. The Company has also acquired coal mine concessions in Indonesia for which it is finalising plans to produce up to 30 MTPA. One of the coal mines, the Moher and Moher Amlohri Extension coal block has already started producing coal.The development of the other mines are in different stages. Coal Bed Methane (CBM) Blocks The Company has stakes in four Coal Bed Methane (CBM) blocks. Drilling work has been completed in one of the CBM blocks. Clean Development Mechanism (CDM) Clean Development Mechanism (CDM) encouraged project developers, in the developing countries, to adopt environmental friendly technologies and/or fuels so that the GHG emissions can be reduced. Such reduced Green House Gas (GHG) emissions will enable the developers of those projects to generate Certified Emission Reductions (CERs) and abate GHG emissions in a cost-effective manner. The Company has successfully registered its projects which use Super-Critical technology, Wind project at Vashpet, Solar PhotoVoltaic (PV) and Concentrated Solar Power (CSP) projects at Dhursar with CDM Executive Board. Health, safety and environment and Corporate Social Responsibility (CSR) The Company attaches utmost importance to safety standards at all its installations. Necessary steps are regularly undertaken to ensure the safety of employees and equipment. Both external and internal safety audits are regularly conducted. Mock drills are conducted to gauge emergency and crisis management brparedness. The Company, as a responsible corporate Citizen, is conscious of its responsibility to the society and to the environment. The Company has made significant differences to the lives of the people that live in the vicinity of our project sites. Provision of free education, pension to the aged and dependent, sanitation and hygiene, health care and provision of vocational training and self employment Schemes are some of the significant initiatives taken by the Company at its project location. The Company and its subsidiary have also made contribution to a non-profit centre for the development of day care oncology centre in rural Maharashtra for cancer treatment. In line with the requirements of the Companies Act, 2013, the Environment, Health, Safety, Security, Rehabilitation and Resettlement Committee has been renamed as Corporate Social Responsibility Committee. The Committee inter-alia functions as per the mandates brscribed under the Companies Act 2013 and Rules made thereunder. Human Resources The Company has been successfully building up its Human Resources for the implementation and operations of its large power capacity addition program. The Company currently has nearly 1,900 professionals. Teams are put in place both at Corporate Office and in all the project locations. The Company has adopted a strategy of putting senior professionals with domain expertise as Project Leaders and Functional Heads and teams are built around them. The Company also has Graduate Engineer Trainee program and Junior Executive Trainee program under which Graduate Engineers and Diploma Engineers are recruited and trained for working in Power Plants and Mines. The selection process involves academic and technical screening of the candidates followed by personal interviews. The Company has simulators at various Power Plant and Mine locations, where training is being provided. |