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Sunday, July 08, 2012

Reliance Power: Superb Future Ahead
Commissioning triggers ahead; Reiterate Buy
CMP: Rs.108.35
4Q12 (4th Quarter of FY12) reported PAT of Rs.2.3bn, in line with the estimates at PAT level; Other income reported below expectations but impact was offset by negative tax provisioning. 
  • (1) Rosa fully commissioned, (2) Sasan mine production in 2Q13, (3) Butibori unit#1 in Jun’12, (4) JORC study completed for Indo mines & (5) boiler hydro test done for Sasan unit#1. For more details on Power Projects, please CLICK HERE.
  • Building strength - (1) huge cheap captive coal, (2) merchant capacity in captive coal plants only, (3) plants near load centers (PoC), (4) minimizing cost of capital & (5) low to reasonable tariffs - offtake and payment risk minimized.
  • Solidity & positive triggers ignored with stock at around 30% discount to fair value. Foresee RPWR as most sustainable private power utility; Reiterate ‘Buy’ with TP of Rs.155/Share.
Recent Triggers:
(i) Sentimental effect of the 26% hike in power tariff by Delhi Electricity Regulatory Commission effective July. 
(ii) PMO directs environment ministry to grant clearances to 12 projects with 10 MT additional output.
As the country battles coal shortage, the Prime Minister's Office [PMO] on Friday sought to give a push to its production by directing the environment ministry to grant clearances to 12 projects which would lead to an additional output of 10 million tonnes per year. The PMO took stock of the coal production at a meeting attended by representatives of the ministries of coal, power and environment and forest besides the officials of the Coal India Limited [CIL].
The meeting specifically reviewed the status of 12 projects of the CIL which are proposed to increase production by 25 per cent.
At the meeting, it was decided that these projects should be given clearances by the environment ministry within 3-4 month. These are expected to yield additional 10 million tonnes of coal every year. The progress in the matter will be monitored on a monthly basis by the PMO, the sources said. The push comes at a time when the demand and supply gap of coal is expected to touch 200 million tonnes by 2016-17 after crossing the 161.5 million tonnes mark last fiscal. This has severely affected the power sector.
(iii) Against the backdrop of the PMO asking Coal India Ltd (CIL) to sign pacts with power firms, assuring a minimum supply of 65% of the total coal committed to them, the PSU's board will meet on 10th July, 2012 to finalize various issues, including changes in the penalty clause of new model FSAs. CIL has been directed by PMO to provide assured supply of 65% for the first three years of the FSAs, instead of 80% directed by it earlier in April. But in the fourth year, the assured supply has to increase to 72%, followed by 80% in the fifth year of the agreements. CIL, which missed the revised production target last fiscal and produced 435 million tonnes of coal, has set a production target of 464 MT for 2012-13.
(iv) The detailed exploration of 54 coal mines to be allocated, both through the auction and the government dispensation routes, is likely to begin in the next two months. Of these 54 mines, a maximum of 16 have been earmarked for the power sector, 12 for the steel sector, 12 for government firms, 7 for the cement sector, 5 for sponge iron and 2 for surface gasification.
(iv) Amid the People's Bank of China's July 5, 2012 decision to lower key interest rates, the market expects the consumer price index (CPI) for June to reflect a faster fall, to as low as 2%. This suggests that China may be moving beyond the era of negative interest rates (when the rate of inflation outstrips that of saving). Commodity prices are continuing to fall and the growth rate in prices in June is expected to fall to 2.5%, according to Guo Tianyong, director of a banking research center at Central University of Finance and Economics in Beijing. The People's Bank of China said it would cut the one-year renminbi lending rate by 31 basis points, to 6%, effective July 6, expecting borrowing to become more attractive. India could follow the suit, with a positive effect on the overall equity markets. 
(v) The government is likely to exempt companies from paying customs duty on equipment imported for mega power plants and for which the orders have already been placed. A person in the know of the proposal said the exemption was beign planed to ensure projects that had mega status continued to get the inventive since they had already placed orders and signed power purchase agreements with the distribution companies. 
(vi) The recent power sector reforms aims at resolving near-term issues through rationalization of capacity additions and coal supplies. While the government is working on the modalities to resolve the structural issues such as expediting environmental clearances, improving evacuation infrastructure (mostly rail) and implementing power distribution reforms.
(vii) “Overall, although near-term volatility may continue, we think it is a good time to look at the sector. We believe power sector stocks are at an interesting level for longer-term investors. A reasonable mix of defensive companies and more volatile names provides the best positioning, in our view,” UBS Investment Research said in report.
(viii) RNRL-led consortium (RNRL, RELINFRA, Geopetrol and NaftoGaz) won one oil and gas block in the state of Mizoram and received the letter of award on February 12, 2007. The Company signed a contract with the Government of India on March 2, 2007 for exploration and production of Oil and Gas block having acreage of 3,619 Sq. Kms. Petroleum Exploration License (PEL) was notified by the Government of Mizoram on November 20, 2007. The Company has completed environmental impact assessment studies, geochemical studies and geological studies in line with the work commitment.
(ix) Carbon Credits
(a) Sasan Ultra Mega Power Project( UMPP): Sasan Power, implementing the 3,960 MW super-critical technology based power plant, in Singrauli district in Madhya Pradesh, India, is the world’s largest power generation plant ever registered with CDM-EB under United Nations Framework Convention on Climate Change since its inception. It is also the first Ultra Mega Power Project, in India, to be registered with the CDM-EB.  Sasan Power would reduce 2.24 million tonnes of CO2 per year (approximately).This emission reduction effort entitles the project to earn approximately 22.4 million carbon credits during its first ten years of operation. 
(b) Krishnapatnam Ultra Mega Power Project( UMPP): Coastal Andhra Power, implementing the 3,960 MW super-critical technology based power plant, in Potti Sri Ramulu Nellore district in Andhra Pradesh,has become the second UMPP to get  approval for carbon credits from United Nations Framework Convention on Climate change.  Coastal Andhra Power would reduce 1.23 million tonnes of CO2 per year (approximately),an effort that entitles Coastal Andhra Power to earn approximately 12.3 million carbon credits during its first ten years of operation. 
(c) Jharkhand Integrated Power Ltd: Jharkhand Integrated Power, implementing the 3,960 MW super-critical technology based power plant, in Hazaribagh District, Jharkhand, India, has become the third UMPP to get approval for carbon credits from United Nations Framework Convention on Climate change. Jharkhand Integrated Power would reduce 2.13 million tonnes of CO2 per year,an effort that would  earn 21.3million carbon credits for Jharkhand Integrated Power during its initial ten years of operation. 
(d) Samalkot Power Ltd: Samalkot Power, implementing the 2,460 MW natural gas based power plant, in East Godavari district, Andhra Pradesh. The project is currently under validation. Samalkot Power, being implemented in three CDM phases/blocks reduces approximately 5.55 Million tonnes of CO2 per year in comparison to baseline. This would entitle Samalkot Power to approximately 55.5 Million Carbon credits during its first ten years of operation, enabling it to become the world largest generator of carbon credits in the world. 
(e) Rajasthan Sun Technique Energy Private Ltd: Rajasthan Sun Technique is developing a large-scale solar power project in Jaisalmer district, Rajasthan. Validation of the project is currently underway.  Rajasthan Sun Technique would reduce 266,169 tonnes of CO2 per year (conservatively) in comparison to baseline. This would entitle Rajasthan Sun Technique to approximately 2.6 million carbon credits during its initial ten years of operation. 
(f) Reliance Cleantech Private Ltd: Reliance Clean Technique is developing a large scale  solar power project in Jaisalmer district,Rajasthan. Validation of the project is currently under progress. This would entitle Reliance Cleantech to approximately 3.7 million carbon credits during its initial ten years of operation.
(g) Dahanu Solar  Private Ltd: Rajasthan Sun Techinque  is developing a large scale solar photovoltaic (PV) power project in  Jaisalmer district, Rajasthan. Validation of  the project is currently underway. The Project would result in 153,717 tonnes of CO2 reduction per year (conservatively) in comparison to baseline.This would entitle Rajasthan Sun technique to approximately 1.53  million carbon credits during its intial ten years of operation.
(x) Renewable Energy: Reliance Power Ltd is developing a 40 MW solar photovoltaic project, India's largest such project , in Pokharan, Rajasthan which is expected to be commissioned by Q2FY13. This will be followed by a 100 MW solar thermal project at the same location which is expected to be commissioned by May 2013. It is also developing a 200 MW wind project in Vashpet, Maharashtra. The company has around 94 MW of operational wind farms within the Group. Reliance Power Ltd has finalized plans to develop 5,292 MW of hydroelectric power projects which are at various stages of development. It has also identified locations for setting up of wind and solar based capacities which would take its total renewable capacities to 1,000 MW. The company expects that, of its total energy portfolio as much as 10 (ten) percent will come from renewable energy capacities.
(xi) Fuel BusinessThe company has developed a portfolio of power projects utilizing a variety of fuel sources. Presently it is developing more than 18,000 MW of coal-fired capacity using domestic and imported coal, 8,000 MW of gas-fired capacity and 4,620 MW of hydroelectric capacity. 
##Sasan Coal Mines: The Government of India had allocated Moher, Moher–Amroli extension and Chhatrasal coal mines in the Singrauli coalfields to Sasan Power Limited, the company developing Sasan Ultra Mega Power Project. The allocation was made in the year 2006. Sasan Power Limited was transferred to the company in the year 2007. Subsequent to the transfer, the company along with the strategic partner North American Coal Corporation Limited developed a detailed mine plan for the Sasan coal mines. North American Coal Corporation Limited, the strategic partner for developing and operating coal mines, is an American coal mining and mining services company and ranks as America’s largest lignite coal producer.
According to the mine plans prepared by the company for these mines, the aggregate coal reserves of these mines are around 700 MT with a production level of 25 mtpa. The average stripping ratio of the mines would be 4 with an average calorific value of the coal would be around 4600 kcal. The Moher and Moher–Amroli and Chhatrasal coal mines are approximately 20 km from the Sasan project and 40 Km from the Chitrangi project. On commencement of production, the company will be the largest coal mining company in the private sector in the country. In order to produce coal from these mines in the most productive and cost-efficient manner, the company evaluated coal mining equipments from reputed vendors from different countries. The company would be procuring the best-in-class and large capacity coal mining equipments such as Draglines, Shovels, Dumpers from the most reputed companies in the world. The productivity being targeted with these equipments would be the best in the country and the company would seek to benchmark its productivity with the best coal producers in the world. Along with its strategic partner, the company has put in place a coal mining team capable of implementing these plans. The team is lead by very experienced coal mining professional who had developed and operated coal mines in the same area. The other members of the team too are people having rich experience of developing and operating coal mines. The experienced management team is supported by other young coal mining professionals who are also being trained in the deployment of the high quality equipments being procured for the project.
## Tilaiya Coal Mines: The Government of India has allocated Kerandari ‘B’ and ‘C’ coal blocks in North Karanpura coal fields the state of Jharkhand to Jharkhand Integrated Power Company Limited which is developing Tilaiya Ultra Mega Power Project. The allocation was made in the year 2007. Jharkhand Integrated Power Limited was transferred to the company in the year 2009. Subsequent to the transfer, the company along with the strategic partner North American Coal Corporation Limited developed a detailed mine plan for the Tilaiya coal mines. According to the mine plans prepared by the company for these mines which have been submitted for approval to the Ministry of Coal, Government of India, the aggregate coal reserves of these mines are around 1.3 billion tonees and the mine plans envisage a production level of 40 mtpa. The Tilaiya coal mines are approximately 100 kms from the Tilaiya project. The production of coal from these mines are being planned such that tit meets the coal requirements of the Tilaiya power project, On commencement of production, the company will be the largest coal mining company in the private sector in the country.
## Coal Mines in Indonesia: The company is developing the 3,960 MW Krishnapatnam Ultra Mega Power Project which would be using imported coal. To supply coal for this project the company, through its subsidiary – Reliance Coal Resources Private Limited – has acquired 100% economic interest in two coal companies in Indonesia which own three coal mines in Indonesia. These coal mines are located in South Sumatra in Indonesia. The company has evaluated these mines and they have significant resource potential which can support coal production which will not only meet the requirements of Krishnapatnam, but additional capacities also. The coal mines in Indonesia are located at an average distance of around 200 km from the nearest port in Bengkulu. We are planning to develop coal mines such that they commence production in time to meet the requirements of the Krishnapatnam project. The company is planning to develop the railway infrastructure facilities for transporting the coal from the mines to the port in Indonesia. The coal from the Indonesian port would be transported through ships to the Krishnapatnam port. The tie-up for shipping logistics is under finalization.
## Coal Bed Methane: Coal Bed Methane is a natural gas absorbed in coal and lignite seams and is an eco-friendly source of energy. Coal is both the source and reservoir rock for CBM. CBM production is done by simple depressurization and dewatering process. To harness this new source of energy in the country, the Government approved a comprehensive CBM policy in July, 1997 for exploration and production of CBM gas
In the year 2006 an RNRL-led Consortium won four CBM blocks in CBM III round, having an acreage of 3,251 sq. kms. The CBM blocks are located in Madhya Pradesh (one Block), Andhra Pradesh (one Block) and Rajasthan (two Blocks). After signing the contracts for all four blocks with the Government of India on November 7, 2006, the Company has obtained Petroleum Exploration Licence (PEL) for three of the blocks in MP and Rajasthan. The consortium has completed the Environment Impact Assessment study, geological and remote sensing studies in all the four blocks. Preliminary geological assessment has also been completed. The core hole drilling and testing is expected to commence soon. For more details please CLICK HERE.

References
(iii) www.moneycontrol.com
(iv) www.wantchinatimes.com
(vi) http://www.reliancepower.co.in
(vii) Emkay Global Financial Services Ltd
Disclaimer: I do not hold any position in any of the Power Companies listed in BSE/NSE, including Reliance Power Ltd. But my clients could be having positions in the Power Sector. This is just a follow on report on Reliance Power and the Power Sector in general. 
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