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Essar Energy PLC (ESSR)

  Print      Mail a friend       Annual reports

Tuesday 12 April, 2011

Essar Energy PLC

2010 Annual Report and Accounts and Notice of AGM

RNS Number : 7948E
Essar Energy plc
12 April 2011





Essar Energy plc  2010 Annual Report and Accounts and Notice of Annual General Meeting


April 12 2011: Essar Energy plc ("Essar Energy" or the "Company") announces that its first Annual General Meeting will be held at 11.00am on Wednesday 18 May 2011 at Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.

In connection with this, the following documents have been posted or made available to shareholders today:

- Notice of Annual General Meeting;

- Annual Report and Accounts for the year ended 31 December 2010; and

- Proxy Form for Annual General Meeting.

A copy of the Annual Report and Accounts and the Notice of Annual General Meeting have been submitted to the National Storage Mechanism and will shortly be available for inspection at:

The Company confirms that the Annual Report and Accounts and the Notice of Annual General Meeting are now available to view or download in a pdf format from the Essar Energy website within the Investors and Media section under the Annual General Meeting tab.

A condensed set of the Company's financial statements and extracts from the Business Review were included in the Company's preliminary results announcement of its annual results for the year ended 31 December 2010 which was released on 21 March 2011 and can be downloaded from the Company's website at

That information, together with the Appendix to this announcement, which contains additional information which has been extracted from the Annual Report and Accounts for the year ended 31 December 2010, constitutes the material required for the purposes of compliance with Disclosure and Transparency Rule 6.3.5. A glossary of terms is available on pages 120 to 121 of the Annual Report and Accounts and page and note references in the Appendix below refer to page numbers and notes in the Annual Report and Accounts.

This announcement should also be read in conjunction with, and is not a substitute for reading, the full Annual Report and Accounts. 

For further information on Essar Energy, please visit

For further information on the Essar Group, please visit




UNITED KINGDOM                           

Mark Lidiard, Director of Investor Relations & Communications

Tel:  +44 20 7408 8714, +44 7554 440421


Andrew Turpin, Head of Media Relations

Tel:  +44 20 7408 8702, +44 7827 283659


About Essar Energy

Essar Energy (LSE:ESSR) is a world class, low-cost, integrated energy company with an established track record.

Essar Energy, through its subsidiaries, owns one of India's largest private power producers with 1,600MW of installed capacity and projects under planning and construction to expand its capacity to 11,470 MW by the end of 2014.

Essar Energy, through its subsidiaries, owns one of India's fastest growing private sector oil and gas companies with a diverse portfolio of exploration and production assets. The Vadinar refinery, located in Gujarat, is India's second largest private sector oil refinery with throughput capacity of 14mmtpa and plans to expand to 20mmtpa by September 2012.


About Essar Group

The Essar Group (the "Group") is a multinational conglomerate and a leading player in the sectors of Steel, Oil & Gas, Power, Communications, Shipping Ports & Logistics, Construction and Minerals. With operations in more than 20 countries across five continents, the Group employs 70,000 people, with revenues of USD 15 billion in 2009.


This announcement contains certain forward-looking statements, including statements regarding the Group's plans, objectives and performance.  Such statements relate to events and depend on circumstances that may occur in the future and are subject to risks, uncertainties and assumptions.  Although the Group believes that the expectations reflected in such forward looking statements are reasonable, there are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward looking statements, including, without limitation, the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts or licences; fluctuations in demand and pricing in the Oil and Gas, Power and Energy industries; fluctuations in exchange controls; changes in government policy and taxations; industrial disputes; war and terrorism. These forward-looking statements speak only as at the date of this document. The Group undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise, except to the extent legally required.

These statements (and all other forward-looking statements contained in this document) are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond the Group's control, are difficult to predict and could cause actual results to differ materially from those expressed or implied or forecast in the forward-looking statements. 




Chairman and Vice Chairman's statement

Delivering against strategy


"We are creating energy assets that are critical to the economic development of India."



Welcome to Essar Energy's first annual report as a publicly listed company. Despite listing in volatile market conditions against a backdrop of a challenging global economic and financial environment, we are pleased to report that your Company has performed well. At the end of 2010 our share price had risen 38.1% from the listing price of 420 pence, compared with a rise of 6.2% for the FTSE 100 over the same period - a creditable performance.


The global economic outlook is improving even though the recovery in the developed world remains fragile. India however, continues to stand apart, along with other emerging economies, and deliver solid growth due to its high domestic consumption demand. As demand in India grows, so will its energy needs and we are creating energy assets that are critical to the economic development of India. We believe that the fundamentals driving Indian growth are robust and as a result, it is clear that the long term outlook for Essar Energy remains strong.


Government projections indicate that the Indian economy is set to grow at over 8% this financial year. All policies of the Government rest on the premise that the domestic economy will see a high demand for goods and services as India modernises and industrialises further. While there is some concern regarding inflation, the Indian Chief Economic Advisor recently made a statement that food inflation will come down to 7% from the present 10%. Most macroeconomic analysts continue to believe the India growth story is intact and the only possible threat is an uncontrolled increase in global oil prices.



Our strategy is clear; to create a world-class, low-cost, integrated energy company focused on India and positioned to capitalise on India's rapidly growing energy demand. While the focus is on India, Essar Energy will also pursue opportunities overseas which support our strategy and deliver value to our shareholders. To deliver our strategy we will; optimise the performance of all our existing assets; deliver growth through a variety of green-field and brown-field power and oil and gas projects; leverage our skills and Indian asset base to identify further growth opportunities; and, act as a good corporate citizen with respect to the health and safety of our employees, the communities in which we operate, and the environment. The delivery against this strategy will provide a more predictable business performance over time which in turn, underpins the creation of value for our shareholders, customers, employees and, importantly, the communities around our operations.


We are happy to inform you that during the year, your Chief Executive, Naresh Nayyar, and his team have successfully focused on delivering in line with the above stated strategy. This has resulted in a strong production and cost performance as well as progress on our significant pipeline of growth projects.


We are also happy to share that as a part of seeking opportunities in overseas markets, we announced an exclusivity agreement with Shell UK Limited in February 2011 in relation to an offer for the proposed purchase of the oil refinery and other associated assets at Stanlow, near Ellesmere Port, Cheshire, for a cash consideration of US$350 million. The acquisition of the high complexity Stanlow refinery, which is the second largest refinery in the UK, will give Essar Energy direct access to the UK market, is aligned with the Company's strategy to provide options for the export of refined products from the Vadinar refinery in India, and is being acquired at a competitive price when compared to other recent comparable refinery transactions. The acquisition will be conditional on, amongst other items, the approval of Essar Energy's shareholders at a general meeting and is expected to be completed in the second half of 2011.


While we continue to deliver well against our plans, we are seeing some delays in certain regulatory approvals that could impact the financial and operating performance of the Company. However, timely receipt of approvals is a key risk for all companies operating in India, and other developing economies. More details on some of these items are given in the Principal Risks and Uncertainties section of this report.


While the health and safety performance at our operational plants was satisfactory, our overall progress in this critical area can be further improved. 2010 was declared as the Year of Safety and during this period the Vadinar refinery achieved more than 1,000 days and over 18 million man hours without a lost time incident. While the Board is pleased with these results at our operating plants, our progress in the area of health and safety, in particular, remains a focus at both our construction and operating sites, and we remain committed to improving our performance in this area.


Board governance

Essar Energy's Board is committed to the highest standards of corporate governance and advancing the interests of all shareholders equally. The Directors of Essar Energy were all appointed ahead of our Listing on 7 May 2010.The Board is comprised of four independent directors and three non-independent directors, including your Chief Executive who is the sole Executive Director. The Board is committed to having a majority of independent directors who will bring relevant knowledge and experience to the Company.


In line with the principles of the Combined Code, the Board has established an Audit Committee, a Remuneration Committee, a Nominations and Governance Committee, a Health, Safety and Environment Committee and the first report on these Committees is provided in the Corporate Governance report.



One thing that always impresses us is the quality of the people throughout Essar. Our strategy is built upon creating world class assets, but our results will be a function of the quality of the people constructing, operating and managing these assets.


Naresh Nayyar is a talented and experienced Chief Executive and he has developed a strong and diverse team with a depth of talent to support him. On your behalf, the Board would like to thank Naresh and everyone involved with our Company for the contribution they have made in making our first year as a 'plc' so successful.


Ravi Ruia



Prashant Ruia

Vice Chairman


18 March 2011


Key milestones

May 2010

Essar Energy lists on the London Stock Exchange,becoming the largest primary offering in the London market since 2007


June 2010

Essar Energy enters the FTSE 100 Index, creating additional interest in the shares of Essar Energy and increasing the liquidity of the Company's shares


June 2010

Essar Energy declared winner of four CBM blocks, comprising of 2,233 sq. km of exploration acreage and in-place prospective resources of over 7.6 tcf of CBM gas


July 2010

Essar Energy acquires Navabharat Power Pvt. Limited, a 2,250 MW coal fuelled power plant being set up in Orissa


February 2011

Essar Energy completes convertible bond offering to raise US$550 million



February 2011

Essar Energy enters into exclusivity agreement and US$350 million offer for Stanlow refinery, the second largest refinery in the UK.



Chief Executive's report

Delivering strong results


"We continue to execute well against our significant pipeline of growth projects."


2010 was a year that presented a mix of challenges and achievements. Despite ongoing uncertainty across the global economy, Essar Energy, with its focus on India, was able to deliver a strong operating and financial performance.


Financial results

Our continuing focus on the stated strategy has resulted in a profit before tax for the year of US$365.5 million and operating cash flow of US$652.7 million. We remain on track to have in place 11,470 MW of power generation capacity by the end of 2014, subject to securing fuel for the projects under development, and to upgrade our refinery to 20 million tonnes per annum capacity with a complexity of 11.8 by September 2012. This is in line with the plans that we announced at the time of our initial public offering.



Across the portfolio we saw a strong operating performance with good availability from our power plants and another year of record production from our Vadinar refinery.


Despite strong power plant availability, our generation was lower than planned due to high rainfall during the monsoon season and high gas prices. However, the financial impact of this lower generation is largely mitigated by the structure of our power purchase agreements where payments are primarily based on availability. In October, the first unit of our 380 MW, Vadinar P1 gas fired power plant synchronised with the grid, the first to do so since our Listing in May 2010.


The Vadinar refinery continues to perform well and set records for production and throughput in each quarter of the year. Total throughput for the year was 14.7 million tonnes of crude, well above the refinery's name plate capacity of 10.5 million tonnes per annum. In total, we processed 20 different crudes during the year including Mangala, our first domestic crude, being delivered through a 590km heated pipeline from Rajasthan, which is in the north of India.


June saw the de-regulation of gasoline prices in India which enabled us to compete on a level playing field with the public sector retailers. The result was an increase in the sales and profitability of gasoline from our near 1,400 retail fuel outlets across India. Despite this, increasing oil prices have pushed up the price of gasoil, delaying the government's plans to de-regulate gasoil which accounts for around 80% of our retail sales. We continue to plan for 1,700 retail fuel outlets across India by April 2011, but are likely to slow down our plans beyond this time until the path to the de-regulation of gasoil becomes clear.


Growth projects

We continue to execute well against our significant pipeline of growth projects. In total we invested US$2,957.9 million across our power and oil and gas projects during the year.


In Power, we are currently investing in ten power projects and one transmission project with a combined capital cost of US$2,856.2 million. Six of these projects were under construction at the time of the IPO, but proceeds from the Listing have facilitated the movement of four projects with a combined capacity of 3,570 MW from the development to the construction phase.


2011 is a critical year for our power business as 2,910 MW of new capacity is planned to enter commercial operations during the year. This new capacity will significantly increase the cash flow and profitability of the business and remove the construction risk from these projects. One downside risk continues to be the delay in receipt of forest approvals for coal mines which is holding up our captive mine development.


In our Exploration and Production business, we are extremely pleased with progress at our Raniganj Coal Bed Methane project. At the end of the year we had drilled 49 production wells with 19 producing gas. As each new well is drilled, our knowledge of the field improves and we are confident of reaching our peak production of 3.5 mmscm/day by 2014. However progress on the production sharing contract for our Ratna/R Series field has been slower than expected.


In Refining, the phase 1 of our Vadinar expansion is progressing well and is more than 84% complete as of end February 2011. We expect the expansion to reach mechanical completion by the middle of 2011 and enter commercial production during the second half of 2011. The importance of this expansion is the increase in complexity from 6.1 to 11.8. This will allow us to process a higher proportion of heavy and ultra-heavy crudes and produce more high value products. We expect this to result in an increase in the profitability of the refinery.


During the year we also identified an opportunity to further increase the capacity of the refinery to 20 mmtpa at a very competitive capital cost. This optimisation project has already commenced and is on track to complete by September 2012. Post our expansion, Essar Energy will be in a situation where it will need to export a higher proportion of high value products in the short to medium term, particularly gasoline and gasoil. The natural markets for these products are Europe and the US and, in line with this, we announced in February an offer to purchase the Stanlow refinery in the UK for US$350 million. The European refining industry is facing a number of challenges as existing facilities age and need to be upgraded to meet new fuel specifications. Given Stanlow's scale and high complexity, we believe that Stanlow will be a survivor in this market and under the right ownership it will thrive and prosper. We believe that Stanlow will be a valuable addition to the Essar Energy portfolio and that this acquisition is fully aligned with our stated strategy.


Health and safety

A true measure of success is enabling our employees to operate in a healthy and safe working environment. I am pleased with the way that our employees have embraced our values in this area and our performance has been recognised externally with the award for the Vadinar refinery of the Gujarat Safety Council's winner's shield for the lowest disability injury index in 2009. Also, the Vadinar refinery and the Bhander Power plant at Hazira have received Integrated Management systems certifications from the British Standards Institution after earning both ISO9001/14001 and OHSAS 18001 certification.


Unfortunately, the performance at our under construction projects has been below expectations and is an area of particular focus for improvement. The health and safety of our employees and the communities where we operate is a priority for our Company and is important to me personally as well as the whole senior management team.


Looking forward, our Company has a clear strategy for creating value, using prudent decision making and focused on the Indian energy growth story. At Essar Energy, we have had a good first year and I hope to build on our achievements to deliver our full potential.


Naresh Nayyar

Chief Executive


18 March 2011


Key milestones

April 2010

Essar Energy acquires Aries coal mines in Indonesia, comprising 64 mmt of mineable reserves


June 2010

Essar Energy receives first Mangala crude to Vadinar refinery, through a dedicated heated and insulated pipeline from the oil fields in Rajasthan


October 2010

Unit #1 of Vadinar P1 power station synchronises with the grid, the first to do so since the IPO of Essar Energy in May 2010


November 2010

Essar Energy announces optimisation project to take Vadinar refinery capacity to 20 mmtpa, to be completed by September 2012


November 2010

Four power projects with a combined capacity of 3,570 MW moved to construction phase, taking power capacity under construction to 8,070 MW.



Principal risks and uncertainties


Effective risk management is integral to delivering our strategic goals, whilst protecting our reputation and shareholder value.


Following the detailed risk review undertaken as part of the IPO process, the Board has made significant progress in implementing a robust risk management framework which not only serves to identify and monitor risks across our business, but also to establish specific management controls to reduce the incident and impact of those risks.


Approach to risk management

The overall responsibility for risk management and determination of appetite to undertake activities subject to risk and uncertainty resides with the Board of Essar Energy. However, given the nature of our business, the boards of our divisions and key management personnel across the Company play an important part in managing and monitoring risks. The Company has established formal policies to promote an environment of good governance and robust risk management.


The Board has established a risk register that identifies strategic risks together with financial, operational and compliance risks. The register includes a description of the nature, extent and implication of the risks together with the related management controls. The effectiveness of management controls has been considered in 2010, with supporting documentation provided by those responsible for monitoring specific risks within the business. The controls over risk management have also been subject to internal audit in 2010 with no significant weaknesses identified in respect of the Company's policies and procedures.


Ongoing monitoring of risks

The risk register is formally reviewed by the Board on a half yearly basis to monitor principal risks and the strategies deployed to mitigate them. Ongoing monitoring and management of risks takes place on a monthly basis at the Management Committee meetings where the Chief Executive and Chief Financial Officer of Essar Energy along with divisional senior management discuss key developments and new risk arising within the underlying business divisions. Similarly, the developments in risks impacting the Company at corporate level are discussed at each Board meeting. The Audit Committee is also charged with monitoring effective implementation of controls across the business that specifically impact financial risks.


Further details of the procedures undertaken by the Board of Essar Energy and its Committees are set out in the Corporate Governance report.


There are a number of risks and uncertainties which could have an impact on the Company's results and operations in light of the nature of the industries in which our businesses operate. Our principal risks are:


Group-wide risks



Compliance with regulation and obtaining licenses and permits



All of the Company's operations are extensively regulated and the delivery of our strategy is largely dependent on obtaining the appropriate permits, approvals and licenses to complete our expansion projects, complying with their conditions and the exploration and development of oil, gas and coal blocks. The failure to obtain or comply with the terms of such permits and approvals would prevent the Group from achieving its growth targets and could ultimately lead to the impairment of existing assets.



The Company closely monitors compliance with regulatory requirements across its business and heads of each division and operations confirm compliance with all applicable laws and regulations.


The need for permits, approvals and licenses for expansion projects and the exploration and development of oil, gas and coal blocks is assessed prior to undertaking any works or investments. The ability to obtain the necessary regulatory approvals to successfully deliver our strategic goals on time is largely out of the control of Management. However, Essar continues to have a successful working relationship with national, state and local authorities and expects to obtain all necessary approvals.



Our ability to complete major projects on time and within budget



The Company is reliant on the completion of major projects to maintain its projected growth levels. In particular, there is a need to ensure projects are managed on time, including the delivery by contractors and suppliers, and within budget using efficient technologies to achieve the required specifications. If projects are not executed on time and to budget, the planned growth and profitability of the Group will not be achieved.



The Company has outsourced the management and construction of major projects to specialist expert project management and EPC contractors who are related parties. The risk of overruns is further mitigated through entering turnkey contracts with these contractors and suppliers.


Progress on all major projects is monitored on a monthly basis by the relevant project review managers who report to the Project Management Committee. Key concerns are reported to the Essar Energy Management Committee and ultimately the Board, where actions to be undertaken are considered and agreed.



Funding requirements for future growth



The Company operates in a capital intensive industry and has significant financing requirements. This requires continued access to commercial banking facilities, capital markets and maintenance of short term working capital funding as well as continued compliance with banking covenants.


The Company also needs to service debt raised on a timely basis. The servicing of working capital funding is dependent on timely payments from customers whilst specific debt raised for expansion projects largely depends on timely completion of related projects. If the Group does not have access to funds or fail to service its debt on a timely basis it could put at risk its status as a going concern.



The completion of the IPO in 2010 as well as the convertible bond issue announced in January 2011 has significantly improved the Company's liquidity position and ability to meet equity financing requirements. Essar continues to have a strong relationship with banks putting the business in a strong position to raise necessary debt financing for our projects and operations.


The Company also maintains working capital and cash flow projections to identify funding requirements and ensure facilities are available to meet short term funding needs. The risk of funding shortfalls is further mitigated by arranging debt in India where standard market practice is to automatically roll over facilities unless circumstances significantly change. The Group has historically successfully rolled over facilities in line with market practice and retains good banking relationships.


In addition, banking covenants are monitored on an ongoing basis to ensure compliance.


Servicing of specific debt raised for expansion projects is managed through agreeing repayment profiles consistent with the timeline for completion of related projects.



Our ability to retain tax incentives in the future



The Company currently enjoys, in the form of tax holidays, exemptions and subsidies, the benefit of various tax incentives provided by the Indian Federal and state authorities designed to encourage investment in the power and oil and gas sectors. These incentives have a material impact on the investment returns on the Company's existing and planned power plants, exploration and production projects, and the Vadinar refinery. In addition, the Company is currently engaged in litigation with the Government of Gujarat, which has been appealed to the Supreme Court, in respect of deferment of payment of certain sales taxes.


The Company's results and financial position would be materially adversely affected should claims for these benefits be disallowed.



The Company continues to monitor changes and developments in respect of incentives provided by the Indian Federal and state authorities. Project investment returns are evaluated based on the expected incentives available to the Company and are revised based on the most up to date guidance available. In respect of the deferment of payments of certain tax incentives within the State of Gujarat, the Company has received a favourable legal opinion and judgement at the High Court and believes its position to be supportable and justified within the appeal process. The matter continues to be monitored closely with appropriate provisions being considered at each financial reporting period end.




Reliance on Essar Global and affiliated Essar companies as major suppliers and customers and managing conflicts of interest



The Power business, in particular, is dependent on Essar Group companies as major suppliers and customers. The loss of this relationship could have a significant impact on the Group's continued success. In addition, as the controlling shareholder, Essar Global may have conflicting interests with the Company. This could lead to transactions being entered into that would not be in the best interests of the Group.



The Company has a close working relationship with Essar Global with representation of senior Essar Global members on the Board. There are also long term contractual arrangements with Essar Global and other Essar companies to ensure the Company's interests remain protected.



Commercial and reputational damage as a result of Health, Safety or Environmental incidents or conflicts with local communities



The Company is at risk of commercial and reputational damage as a result of Health, Safety or Environmental incidents given the nature of its operations. Further, relationships built with local communities in locations where the Company operates needs to be maintained to avoid any operational disruptions. The loss of confidence any incident might create could have an adverse effect on the overall valuation of the Group and its ability to work effectively with local and national authorities.



The Company has a formal Health, Safety and Environmental policy with related HSE management systems in place. These are communicated to the relevant businesses and employees with training provided on a regular basis.


Regular reviews are carried out on compliance with the HSE policy and related HSEMS as well as adherence with regulatory requirements. The HSE Committee reports directly to the Board, which ultimately monitors the effectiveness of various policies and systems.


Tools are in place to monitor emissions from plants and the refinery. Medical expertise and support is available at all locations.

The Company works closely with local communities to maintain relationships and to ensure that concerns are heard and acted upon on a timely basis.



Fluctuations in foreign exchange rates



The price of feedstock, natural gas, imported coal and crude oil needed to run the Group's power operations and for the production of refined petroleum products are generally denominated in or tied to the US dollar, with other operating expenses denominated in rupees.


Additionally, the Company's functional and presentational currency is the US dollar. Therefore, it also faces translation risk to the extent assets, liabilities, revenues and expenses of its subsidiaries are denominated in currencies other than the US dollar.


Whilst the Company's results are presented in US dollars, dividends to shareholders will be paid in pound sterling in the future.

As such changes in the exchange rates could significantly impact both the operational and reported results.



The business enters into forward foreign exchange contracts to cover foreign currency payments and receipts as well as to manage foreign exchange risks associated with anticipated sales and purchase transactions. The Management Committee monitors the level of exposure to foreign exchange rate fluctuations across the business and makes recommendations in respect of future hedging. Formal strategic polices are under implementation to define the business' appetite for foreign exchange fluctuation, which will be rolled out across the Company going forward.



Oil and gas business risks



Fluctuation of crude oil prices, refined petroleum products prices and refining margins



The Oil business is dependent on the margin between crude oil prices and refined petroleum product prices to maintain profitability. Operating efficiency and access to crude oil of the required quantity, quality and prices has a significant impact on the Company's performance. Whilst refined product normally tracks changes in feedstock prices, there is normally a lag which could seriously impact short term working capital and profitability.



The Oil business uses long term contracts as well open international markets to source crude oil at competitive prices. Management prepare four month rolling plans on a weekly basis to identify any changes in risk profile and take appropriate action on a timely basis. The use of commodity hedging further reduces fluctuation in refining margins. Other methods are also used by the Oil business to drive down costs such as increase in the use of cheaper tough crudes and use of blending of different grades to improve the product slate as well as increasing production efficiency through technological advances.



Exposure to adverse weather conditions and natural disasters



The Company has experienced delays in both operational activity and completing projects as a result of adverse weather conditions. The locations of the major assets are in areas that are subject to adverse weather conditions and/or natural disaster. The hazardous nature of the Company's operations exacerbates the impact of adverse weather and natural disaster. This could result in the shutting down of major assets with consequent failure to maintain profitability and requiring additional capital to bring the asset back into its former state.



Management undertakes a detailed risk assessment prior to the commencement of major projects that considers the potential for adverse weather and natural disaster.


In addition, business continuity measures, in accordance with the Business Continuity policy and Crisis Management procedures, are in place for locations and ongoing projects at risk.


Appropriate insurance is also taken to further reduce the exposure to adverse weather conditions and natural disasters.


Power business risks



Timely access to coal and other fuel supplies at appropriate prices



The Company requires access to coal and other fuel supplies at appropriate prices in order to generate profits from its Power expansion projects as well as its existing power plants. Whilst the Power expansion projects have captive supplies identified, a delay in obtaining permissions to extract coal may result in the need to purchase temporary supplies at regulated or market prices. This could have a significant impact on profitability.



The Company will be able to source coal internally once the available 450 tonnes of coal resources can be developed. In the short term, the Company will secure temporary supply through tapering coal linkages, third party contracts and market purchases.



Power plant availability and profitability



The Power business' profitability is largely a function of its ability to operate its power plants to ensure availability under the terms of the Power Purchase Agreements. The failure to achieve required availability levels would have a direct impact on profitability and cash flow.


In addition, the Power business seeks to expand further into the merchant sales market which will not provide the Company with the same level of protection for fixed and variable costs involved in generating power, as currently received under PPAs, and may be subject to seasonality. This would result in less certainty when projecting profits and cash flow.



The plants' availability levels are continually monitored to ensure issues are highlighted and addressed with immediate effect. The low average age of the Company's plants and regular maintenance enhance efficiency levels. Costs are also managed through fixed supply agreements and secured fuel supply.


The Company intends to supply power for merchant sales from the lowest cost power stations in order to ensure the profitability of these plants even at low merchant prices.



Reliance on a few major customers



The Power business supplies to a small number of large customers under PPAs. In particular, there is a significant relationship with GUVNL in respect of the provision of power. The Company has in the past experienced payment difficulties for services provided to GUVNL which, if continued could have a significant impact on the Company's results. There is also an ongoing litigation case with GUVNL, which may result in financial losses.



The litigation with GUVNL continues to be ongoing at the date of this report. To date the court rulings have been largely in favour of the Company and Management consider the need for appropriate provisions at financial reporting period end.


The Company has tight monitoring controls over receipt of overdue amounts from customers and litigation is undertaken where necessary.




This information is provided by RNS
The company news service from the London Stock Exchange