Reliance Power Ltd Management Discussions.

Forward looking statements

Statements in this Management Discussion and Analysis of Financial Condition and Results of Operations of the Company describing the Companys objectives, expectations or predictions 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 realised. 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 expressed in the statement. Important factors that could influence the Companys 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 and such other factors.

The financial statements of the Company have been prepared in accordance with the provisions of the Companies Act, 2013 (the Act) and comply with the Companies (Indian Accounting Standards) (Ind AS) Rules, 2015, which have been notified by the Central Government on February 16, 2015. 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/(loss) for the year. The following discussions on our financial condition and results 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.

Indian Power Sector

The Indian power sector in 2019-20 has been characterised by a less than targeted addition to installed generation capacity; decline in pace of growth in power generation; low capacity utilisation; subdued electricity demand; narrowing of energy deficits; increase in power purchase from power exchanges; Aggregate Technical and Commercial losses (AT & C Losses) and Cost and Tariff rate gap (ACS - ARR) above target; increase in outstanding dues of DISCOMs and bankruptcy of large generation assets.

Government has been taking several initiatives to address the challenges faced by the power sector like steps towards implementation of recommendations of the High Level Empowered Committee to address issues of Stressed Thermal Power Projects, removal of end-use restrictions for participating in coal mine auctions and opening up the coal sector fully for commercial mining by domestic and global companies; opening and maintaining of adequate Letter of Credit (LC) as Payment Security Mechanism (PSM) under Power Purchase Agreements (PPAs) by DISCOMs; treating letter of comfort (undertaking) issued by state-run firms such as PFC, REC and IREDA at par with bank guarantees to reduce procedural delays for bidding in clean energy projects; and removal of tariff cap on solar and wind power auctions. However, the emerging economic disruption caused by the COVID-19 pandemic has added to the challenges facing the power sector. There has been a sharp decline in the electricity demand, by 20 to 25%, primarily from industrial and commercial consumer segments, arising from lockdown announced by the Government to contain the outbreak of COVID-19. To provide relief to consumers, various State Governments / Discoms have extended due date of bill payments. As a consequence, revenue loss and average lower realisation by DISCOMs has led to Generating and Transmission companies struggling to collect their receivables from DISCOMs to sustain their levels of operations. Recognising the challenges faced by DISCOMs, Ministry of Power (MoP) has initiated several measures like reduction of late payment surcharge (LPS) and reduction of 50% in the Letter of Credit mechanism required to be maintained by the DISCOMs when scheduling power.

To address the liquidity challenges emerging from the lockdown and consequent economic impact, Reserve Bank of India (RBI) allowed banks to grant moratorium period for all principal and interest payments and permitted to defer recovery of interest applied on working capital facilities during the three month period of 1st March, 2020 to 31st May 2020. In order to provide relief to generating companies and increase liquidity in the system, Coal India Limited allowed the facility of usance letter of credit for payment of coal.

Demand and supply outlook

On the demand side Indias per capita power consumption is at ~1181 kWh/ year (as on March, 2019), which is about one-third of the worlds average ~3400 kWh/ year consumption. Growing population along with increasing electrification and per-capita usage, and expansion in economic activities are expected to drive growth in power consumption.

However, in FY 2019-20, peak power demand growth moderated to 3.8 percent and demand growth in energy terms was 1.2 percent. The economy hit a multi-quarter low and going forward, the electricity demand is expected to contract owing to global recession, largely driven by slippages in commercial and industrial demand. With the industrial and commercial sector together accounting for nearly 50% of the countrys electricity consumption, a decline in their consumption would no doubt weigh down on overall demand of generation accordingly.

Although there has been an increase in installed power generation capacity in 2019-20 from the year ago, it falls well short of the set target, mainly due to the lower capacity addition by the conventional power sources, which dominate the countrys power mix (77% of installed generation capacity).

There has been a progressive shift towards renewable sources (wind, solar, bio and small hydro). In the last 5 years, the share of renewable energy in the installed capacity has increased from ~12% (32 GW in March 2015) to ~23% (87 GW in March 2020).

Low demand scenario impacted performance of coal-based thermal power generation, the source of two-thirds of energy supply, which saw a decline of 12.5 percent YoY. PLF of coal-based thermal plants was at 56 percent for FY 2019-20. In the near-term, the challenge is to mitigate the adverse impact of COVID-19.

Key risks and concerns

Power sector is a highly capital intensive business with long gestation periods before commencement of revenue streams, especially for projects using conventional technology. Coal-based power projects have average development and construction period of 7 to 8 years and an even longer operating period (over 25 years). Since most of the projects have such a long time frame, there are certain inherent risks in both, 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 areas that need continuous monitoring within the sector are:

1. Weak financial condition of electricity distribution Companies

The financial health of electricity DISCOMs is an area of key concern threatening the very viability of the power sector. DISCOMs are the weakest link in the electricity supply chain and have been suffering on account of operational inefficiencies; inadequate investments in distribution network as well as lack of timely and adequate tariff revisions to help recover costs.

Recognising the difficulties faced by the DISCOMs, the Government has implemented a set of comprehensive measures under UDAY (Ujwal DISCOM Assurance Yojana) to help utilities achieve operational and financial turnaround. Effective implementation of the UDAY scheme will yield favourable results in terms of lower AT&C losses, reduced gap between ACS and ARR (Cost and Tariff rate) and improved operational efficiency of DISCOMs. Additionally, efforts from Energy Efficiency Services (EESL) to replace 250 million conventional meters with smart meters can improve billing efficiency, leading to higher revenue realisation by DISCOMs. The turnaround of DISCOMs will help generating companies in mitigating counter party risks both in terms of payment security and increased demand for power.

2. Power Demand and Plant Load Factor (PLF) of Thermal Power Plants

Power demand in India has grown at a CAGR of more than 4.4 percent in last 5 years. Growth in electricity demand has been met by rapid capacity addition of thermal projects, which has taken place in the last five years. However, rapid addition of renewable capacity in the last two years and lower than envisaged growth in demand for electricity, has led to lower PLF of thermal power plants. National Electricity Plan (NEP) of the Central Electricity Authority (the CEA) estimates that the PLF of coal based stations is likely to be around 56.5 percent by FY 2021-22, taking into considerations likely demand growth of 6.34 percent (CAGR) and 175 GW capacity from renewable energy sources. However, the thermal based power plants would continue to remain the mainstay for meeting the base load requirements considering the intermittent nature of supply from renewable sources.

3. Gas - Continuing supply deficit

Viability of existing as well as newly developed gas-based power plants, aggregating to nearly 24 GW capacity, is adversely impacted due to lack of adequate domestic gas supply in the country. This industry-wide issue, which has led to practically entire gas-based capacity in the country getting stranded, continues to await a long-term resolution.

4. Implementation of New Environment (Protection) Norms

With notification of the Environment (Protection) Amendment Rules, 2015, all coal-based power plants are required to meet the revised emission standards within the stipulated period. For complying with the new environment norms, the developers would need to undertake additional capital expenditure. In order to facilitate the smooth implementation of the same, the Ministry of Power (MOP) vide its letter dated May 30, 2018 has issued directions to the CERC and other State regulators to consider the revised emission standards as Change in Law (CIL) and accordingly devise an appropriate regulatory mechanism to address the impact on tariff. In the present sector context, banks and financial institutions are not forthcoming to finance the additional capital expenditure arising from implementation of new environment norms. Certainty in cost recovery on account of additional capital and operational cost under concluded long-term and medium-term PPAs will hold key to timely completion of additional capital expenditure.

Sasan Ultra Mega Power Project, developed by Sasan Power Ltd., is the most competitive thermal power supplier for all its procurers; has a long-term Power Purchase Agreement (PPA) in place and a strong payment security mechanism mitigating risks relating to demand and weak financial condition of distribution companies. Further, it has a captive coal mine, which provides complete fuel security. During FY 2019-20, Sasan achieved Plant Load Factor (PLF) of 95.85%, which is the highest in the country, for the second successive year. Rosa Power Project, developed by Rosa Power Supply Company Ltd., operates under a cost-plus business model wherein tariffs are determined by the State Regulator under Section 62 of Electricity Act. Rosa Power too has a long-term PPA in place and has a three-tier payment security mechanism mitigating demand & payment related risks. Rosa has always achieved higher fuel supply materialisation and has recorded consistently high plant availability, with FY 2019-20 witnessing a plant availability of 98%. Sasan Power and Rosa Power have been working in right earnest on regulatory, procurement and financing tracks towards implementation of projects to comply with new environmental norms. Your Companys renewable portfolio is fully contracted thus mitigating demand risks.

As brought out above, your Companys operating portfolio is significantly insulated from sector specific risks.

Internal Financial Control and Systems

The Company has put in place internal control systems and processes which are commensurate with its size and scale of its operations. The system has control processes designed to take care of various control and audit requirements. The Company has a robust Internal Audit function which oversees the implementation and adherence to various systems and processes. The internal audit function reviews and ensures the sustained effectiveness of Internal Financial Controls designed by the Company. The internal audit team is supported by the 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 of the Board and the improvements in systems and processes are carried out where necessary.

Risk Management Framework

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 said Committee has been continued having regard to its usefulness although it is not a mandatory requirement pursuant to the Listing Regulations. The Committee undertakes a review of the risks as well as the status of the mitigation plans.

Discussion on Operations of the Company

The Company is in the business of setting up and operating power projects and development of coal mines associated with such projects. The Company has built a portfolio of power projects and coal mines. Of the power projects in its portfolio, the projects aggregating to ~ 5945 MW are operational while the other power projects are under various stages of development.

i. Sasan Ultra Mega Power Project, 3,960 MW pithead coal-based Project in Madhya Pradesh

The 3,960 MW Sasan Ultra Mega Power Project (the Sasan UMPP), the worlds largest integrated power plant cum coal mine continued to deliver strong operating performance among the peers, with a generation of ~33341 million units at the highest ever PLF of ~95.85%, which is the highest PLF in the country, a distinction achieved for the second successive year in its operational history of five years of full operations. Coal production from its captive coal mines was 18.7 Million Metric Tons during the year, which is the highest among the private sector players in India. Including the overburden handled at 74.7 Million CuM, total volume handled at Sasan Coal Mine during the year is 87.2 Million CuM, making it the largest coal mine in the Country in terms of the volume handled. The power generated from the Sasan UMPP is sold to 14 Discoms across 7 States under a 25 year long-term PPA.

ii. Rosa, 1,200 MW coal-based power project in Uttar Pradesh

Rosa power plant completed another year with excellent operational and financial performance. In its 8th year of full operations, the plant generated 6041 MUs of electricity. The entire electricity generated from the project is sold to the State of Uttar Pradesh under a cost-plus regulated PPA.

iii. Butibori, 600 MW coal-based power project in Maharashtra

The 600 MW Butibori power plant in Nagpur, Maharashtra was not operational during the year due to protracted delays in issuance of regulatory orders and lack of fuel supply for one of the units.

iv. Vashpet, 45 MW wind farm in Maharashtra

The Company has set up a 45 MW Wind Farm in Sangli District of Maharashtra. During FY 2019-20, the project generated 70.44 MUs of electricity.

v. Dhursar, 40 MW Solar Photovoltaic (PV) power project in Rajasthan

Dhursar Solar Power Private Limited (DSPPL) 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 2019-20, the project generated 58.63 MUs 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 in FY 2014 - 15. During FY 2019-20, project generated 74.51 MUs of electricity.

vii. Krishnapatnam Ultra Mega Power Project (the Krishnapatnam UMPP), 3,960 MW imported coal-based Project in Andhra Pradesh

Coastal Andhra Power Limited (CAPL), a wholly owned subsidiary of the Company is responsible for development of the Krishnapatnam UMPP. The Project has been facing viability challenges consequent upon changes in the regulations in Indonesia from where coal was intended to be imported for the Project. As the issue could not be resolved through mutual discussions with Procurers and Procurers issued notice of PPA termination & demanded liquidated damages, the Company sought to initiate arbitration and approached Honble Delhi High Court. Following the order by Division Bench of Honble Delhi High Court, the Procurers encashed the bank guarantees available with them and recovered 300 Crore as the liquidated damages. In accordance with the direction of the Honble Delhi High Court, CAPL has filed a petition in CERC. Pursuant to provisions of Share Purchase Agreement for acquisition of CAPL, the Company has approached Power Finance Corporation, the nodal agency which facilitated international competitive bidding for Krishnapatnam UMPP, for buyback of CAPL.

viii. 3,960 MW coal-based power project in Madhya Pradesh

Chitrangi Power Private Limited (CPPL), a wholly owned subsidiary of the Company, had taken up development of a 3960 MW coal-based power project in Madhya Pradesh. In view of the current power sector scenario, especially the demand-supply outlook, implementation of this project has been kept in abeyance.

ix. Samalkot Power Project (SMPL)

The Parent Company, had entered into a Memorandum of Understanding (MOU) with the Government of Bangladesh (GoB) for developing a gas-based project of a 3000 MW capacity in a phased manner. Pursuant to the above, Reliance Bangladesh LNG and Power Limited (RBLPL), subsidiary of the Parent Company has taken steps to conclude a long-term PPA for supply of 718 MW (net) power from a combined cycle gas-based power plant to be set up at Meghnaghat near Dhaka in Bangladesh (Phase-1). The project agreements (comprising Power Purchase Agreement, Land Lease Agreement, Gas Supply Agreement and Implementation Agreement) were signed on 1st September 2019. Parent Company also concluded agreements with JERA Power International (Netherlands) - a subsidiary of JERA Co. Inc. (Japan) to invest 49% equity in RBLPL on 2nd September 2019. JERA owns/ has domestic investments in 26 power projects with 67 GW of generating capacity in Japan and nearly 10 GW of generating capacity overseas (including projects under development). SMPL has signed an Equipment Supply Contract on 11th March 2020 to sell one module for development of the Phase-1 project in Bangladesh.

x. Hydroelectric Power Projects

The Company is developing various hydroelectric power projects, aggregating to 3438 MW capacity, 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 development milestones. However, given the current power sector scenario, expected tariffs of hydro projects and consequent reluctance of Discoms to enter into long-term PPAs for hydro power, the development efforts on these projects have been kept in abeyance.

Coal Mines

The Company has been allocated coal mines in India along with the UMPP. The Moher and Moher Amlohri Extension coal block, a captive coal block allocated to Sasan Power Limited (SPL), is fully operational.

During the year 2015-16, the Government of India cancelled the allocation of Chhatrasal Coal Block to SPL and restricted annual coal production from Moher and Moher Amlohri Extension coal mine to 16 Million Metric Tonnes. The Company has challenged the above directions of the MoC in Honble High Court of Delhi by way of a Writ Petition, which is pending. Based on representations of SPL and recommendations made by the Inter Ministerial Committee (IMC), the Ministry of Coal (MoC) has been relaxing the restriction on annual basis and has allowed to produce 18.7 Million Metric Tonnes of coal during FY 2019-20, which ensured complete fuel security for Sasan UMPP.

The Company also has coal mine concessions in Indonesia.

Coal Bed Methane (CBM) Blocks

The Company has stakes in four Coal Bed Methane (CBM) blocks. Drilling and production testing work of exploration phase - I has been completed in one of the CBM blocks. Other three blocks have since been relinquished.

Health, safety and environment and Corporate Social Responsibility (CSR)

The Company attaches utmost importance to the operational safety standards at all its installations. Necessary proactive and preventive measures are regularly undertaken to ensure that the standards are followed for the safety of employees and equipment. Both external and internal safety audits, as well as mock drills are conducted time to time to gauge emergency and crisis management preparedness.

Corporate Social Responsibility has always been an integral part of Reliance Groups vision. The Company firmly believes in the commitment to all its stakeholders. Special emphasis is laid on empowering local communities around all the business units. The Company undertakes social interventions in the field of Healthcare, Education, Rural Transformation, Swachh Bharat Abhiyan and Environment. The programmes are designed after identifying the needs of the community and are integrated into the annual operating business plans with measurable goals. Our CSR programmes have received numerous awards and accolades over the years from renowned organisations like FICCI, World CSR Congress, Bombay Chambers of Commerce & Industry (BCCI), India CSR and The CSR Journal.

Human Resources

The Company strongly believes its employees are the most valuable asset and the strategic differentiator. With this focus in mind, Reliance Power has taken various initiatives towards aligning its HR processes with its business strategy. Our endeavour is to provide a work environment where continuous learning and development takes place to meet the changing demands and priorities of the business.

The Company has a rich blend of millennial and experienced employees. We have 1533 highly trained and experienced professionals pan India. We take immense pride in the technical and functional excellence of our employees. We impart much importance to learning and development of our employees. Our well laid down career progression plans help in seamless transfer of knowledge to the younger generation and shape them as future leaders.

Discussion on Financial Condition and Financial Performance

An extract of the Consolidated Balance Sheet is placed below:

Rs in lakhs
Particulars As at March 31, 2020 As at March 31, 2019
Property, Plant and Equipment 38,52,600 35,85,180
Capital-work-in-progress 3,61,479 4,27,638
Goodwill on consolidation 1,411 1,411
Other intangible assets 3,349 3,704
Non-current tax assets 5,979 5,290
Non-current financial assets 4,74,646 10,05,074
Other Non Current Assets 1,49,385 1,70,459
Inventory 1,01,418 1,01,172
Current financial Assets 3,78,241 4,77,257
Other Current Assets 5,730 17,499
Assets classified as held for sale 52 13,156
Total 53,34,290 58,07,840
Equity and Liabilities
Equity 11,86,887 17,37,747
Non- controlling interests 1,35,279 -
Non-current Borrowings 19,86,056 18,09,097
Current Borrowings 4,35,333 8,93,895
Other non-current financial liabilities 14,628 16,194
Other Non Current Liabilities and others 4,16,079 4,23,957
Current Liabilities 11,60,028 9,26,950
Total 53,34,290 58,07,840

An extract of the Consolidated Profit and Loss Account Statement is placed below:

Rs in lakhs
Particulars 2019-20 2018-19
Revenue from operations 7,56,227 8,20,131
Other Income 64,014 33,295
Total 8,20,241 8,53,426
Cost of Fuel consumed 2,89,660 2,85,013
Employee Benefit Expenses 20,933 18,650
General, Administration & Other Expenses 1,43,371 1,19,532
Depreciation / Amortisation 83,630 83,825
Finance Cost 305,397 3,20,648
Total 8,42,991 8,27,668
Profit before exceptional Items (22,750) 25,758
Exceptional Items (4,00,421) (3,15,317)
Profit/(Loss) before Tax from continuing operations (4,23,171) (2,89,559)
Profit/(Loss) before Tax from discontinuing operations (1,611) (3,844)
Profit/(Loss) before Tax (4,24,782) (2,93,403)
Taxes (Continuing operations) 2,366 1,775
Taxes (Discontinuing operations) - 3
Total Taxes 2,366 1,778
Profit/(Loss) after Taxes (4,27,148) (2,95,182)
EPS () (basic and diluted) (14.532) (10.523)
Financial Ratios
Particulars 2019-20 2018-19
(i) Debtors Turnover (Days) 114.10 121.86
(ii) Interest Coverage Ratio (without exceptional items) 1.07 1.07
(iii) Current Ratio 0.30 0.33
(iv) Net Debt Equity Ratio* 2.40 1.72
(v) Operating Profit Margin (%)** 40.03 47.91


*Net Debt to Equity Ratio - Increased due to one-time impairment of Property Plant and Equipment and Other assets as an exceptional item.

**Operating Profit Margin - Lower due to non-operational Butibori plant and provision against accrued revenue in view of the regulatory order in one of the subsidiary