Essar Energy plc (LSE:ESSR), the India-focused integrated energy company, yesterday released its Interim Management Statement (IMS) for the period ended 30 June 2013.
Q1 FY2014 highlights
• Vadinar Q1 current price gross refining margins (CP GRM*) averaged US$7.01/bbl, up 49% from US$4.69/bbl in Q1 FY2013
• Vadinar Q1 throughput was 5.14 million metric tonnes (mmt)/36.34 million barrels (mn bbls), up 15% against 4.48mmt/32.65mn bbls in Q1 FY2013
• Stanlow Q1 CP GRM at US$4.86/bbl, compared with US$7.53/bbl in Q1 FY2013, with margin improvement initiatives offset by lower industry margins
• Stanlow Q1 throughput was 2.55mmt/19.27mn bbls, against 2.61mmt/19.65 mn bbls in Q1 FY2013
• Q2 FY2014 refining margins in Asia and Europe trending higher than Q1 FY2014
• US$340 million of Essar Oil Rupee debt converted into dollars, taking total refinanced to US$821 million. Refinancing process continues
Power:
•    Generation in Q1 totalled 3,114 million units (MU), up 60% from 1,945 MU in Q1 FY2013
•    Salaya I delivered a plant load factor of 59% against 22% in Q1 FY2013, while Vadinar P2 had a plant load factor of 86%
•    Availability of captive power plants between 91%-100%
•    Second Rupee power bond of c.US$125 million (Rs.7.5 bn) issued, taking total to c.US$230 million (Rs.13.79 bn), as part of planned total of c.US$830  million (Rs.50 billion) to repay existing project debt, extend maturity dates  and reduce costs
Operating performance
Refining and Marketing
Refining and Marketing India
During the first quarter of FY2014, the Vadinar refinery achieved a throughput of 5.14mmt/36.34mn bbls compared with 4.48mmt/32.65mn bbls in the same period last year, an increase of 15%. This increase followed the completion of the Vadinar refinery optimisation project four months early in June 2012, which lifted capacity to 20mmt per year/405,000 barrels per day and brought the refinery's major capex programme to an end.
Vadinar achieved a CP GRM of US$7.01 /bbl for the quarter ended June 2013, compared with US$4.69/bbl for the same quarter a year earlier, which illustrates the effect of the increase in complexity to 11.8 following completion of the refinery expansion and optimisation projects in March and June 2012, respectively. The benefit of higher complexity was partially offset by lower industry-wide margins during the quarter.
During the quarter, Vadinar's crude mix comprised 92% lower cost heavy and ultra-heavy crudes, compared with 89% in the same quarter a year earlier. On the production side, the proportion of higher value middle and light distillates during the quarter stood at 84%, up on 82% in the same quarter in the previous year.
Refining and Marketing UK
At the Stanlow refinery in the UK, throughput during Q1 FY2014 stood at 2.55mmt/19.27mn bbls, compared with 2.61mmt/19.65mn bbls in the same quarter the previous year, in line with expectations.
The Stanlow refinery achieved a CP GRM of US$4.86/bbl for the first quarter FY2014, compared with a CP GRM of US$7.53 in the same quarter of FY2013. CP GRM was impacted during the quarter by generally lower industry margins, weaker diesel and jet prices relative to gasoline, and higher residues production relating to the stabilisation of the revised refinery configuration following the closure of the lubes plant in February 2013.
The work underway to improve GRMs at Stanlow continues, with the new target announced with Essar Energy's preliminary results in June 2013 of a US$4/bbl uplift in margins by the end of FY2015 relative to the point at which Essar Energy acquired Stanlow in July 2011. At the end of June 2013, US$2.3/bbl of this US$4/bbl had been achieved. This work is important given continuing volatility in industry-wide European refining margins.
Preparations are at an advanced stage for a planned turnaround at Stanlow in H2 FY2014, allowing major maintenance projects to be completed, including a 25 year re-lifing of the residue catalytic cracking unit, the largest in Europe.
Power
During the quarter ending 30 June 2013, all plants performed well with total generation of 3,114MU, up 60% on 1,945MU in the same quarter last year. The increase was due to the commissioning in Q2 and Q3 FY2013 of Vadinar P2 and an increased contribution from Salaya I, which was commissioned in Q1 FY2013, offset by lower generation at Hazira I, Bhander, Vadinar and Vadinar P1.
Captive portfolio
Within the captive generation portfolio (the ROE plant), principally supplying power to Essar Steel at Hazira and the Essar Oil refinery at Vadinar, the key measure of availability, which determines revenues, stood at between 91% and 100% in Q1. The well documented industry-wide issues of low availability of indigenous gas in India and the high price of imported liquefied natural gas meant that generation costs remained at high levels. As a result, the gas-fired plants at Hazira, Bhander and Vadinar P1 experienced lower demand, although revenues at these plants are primarily based on availability, not generation. Planning work continues on the announced conversion of the Hazira I and Bhander plants from gas to coal fired.
Demand for power was high at the new coal-fired 510MWe Vadinar P2 plant, supplying power and steam to the Vadinar refinery. At current coal, gas and oil prices, gross refinery margins are continuing to benefit by over US$1 per barrel through the use of coal fired generation.
Imported coal plant - Salaya I
Performance at the 1,200MW Salaya I coal fired power plant continued to benefit from improved supplies of cooling water, which allowed plant load factors of 59% during the first quarter, with generation standing at 1,541MU. Plant load factors would have been higher but for a 23 day annual shutdown taken during June. The supply of cooling water for Salaya, sourced from the Narmada River and the Vadinar refinery, will remain in place until consents are secured from the Government to complete Salaya's permanent sea water pipeline and coal import facilities.
Domestic coal plant - Mahan I
The 600MW unit 1 at Mahan I commenced generation in Q1 FY2014 in line with the power purchase contracts it signed with Essar Steel. The commencement of supply was delayed due to issues relating to transmission network availability.
The supply of power under the power purchase contract with the Power Company of Karnataka Ltd begins in August 2013. Operation of unit 2, also 600MW, will be subject to signing suitable bi-lateral contracts and to coal availability.
Mahan I, 1,200 MW
Essar Energy is continuing to make good progress towards Stage 2 forest clearance for the Mahan coal block, which is the captive mine for the Mahan I power station.
The Group has also applied for an allocation of coal under Coal India's tapering coal linkage system in order to provide Mahan I with sufficient coal to cover the period until our own mining activities are fully operational. We are continuing to pursue this application.
Currently, the plant is being operated using coal from the e-auction market in India.
Tori I, 1,200MW, and Tori II, 600MW
As at the end of June 2013, Tori I was 43% complete and Tori II 17% complete. The Expert Appraisal Committee at the Ministry of Environment and Forests has recommended that environmental clearance be granted for Tori I unit 2 and for Tori II, and we expect final notification soon.
Coal for these projects will be supplied from the nearby captive coal blocks at Chakla and Ashok Karkata. Essar Energy is currently progressing forest clearance and environmental consents required from the Indian Government in order that mining operations can begin at the two coal blocks. As stated in the preliminary results for FY2013, completion of the Tori projects is dependent upon the timely receipt of these approvals.
Exploration and Production
Essar Energy is continuing to progress its well drilling programme at the Raniganj coal bed methane project in West Bengal, following receipt of environmental clearance in February 2013 for full field development outside forest areas.
As at the end of June 2013, 165 wells have been drilled and c.100,000scm/d of gas was being produced, with most being sold to industrial customers in the local Durgapur area.
On 28 June 2013, the Indian Cabinet approved new Gas Pricing Policy Guidelines on the basis of recommendations made by the Rangarajan Committee. These guidelines will apply from April 2014 and be applicable for five years. It is believed that this would increase the minimum gas selling prices to US$8.40/mmbtu from US$4.20/mmbtu currently. This is expected to significantly improve investment in the Indian upstream gas sector. We have requested the Ministry of Petroleum and Natural Gas to confirm the applicability of the new policy to the Raniganj project.
Debt update
At the end of June 2013, Essar Energy had underlying net debt (excluding working capital loans) of US$6,660.8 million, which is in line with our plans. The underlying net debt at the end of Q4 FY2013 was US$6,740 million. The fall in net debt in dollar terms during the quarter was due to the significant depreciation of the Rupee, which has continued since the period end.
Essar Oil announced with its Q1 FY2014 results on 14 August that it had completed the conversion of a further US$340 million of its Rupee debt into US dollars. This takes the total converted into US dollars to US$821 million, all at significantly lower interest rates. Discussions continue with banks regarding further dollarisation of Essar Oil's debt.
At Essar Power, two Rupee bonds have been issued to date, of c.US$105 million (Rs.6.29bn) and c.US$125 million (Rs.7.5bn), and more are expected to follow, with an intended total of c.US$830 million (Rs.50bn). The proceeds will primarily be used to make repayments on existing project loan facilities within the power business, mainly in relation to our coal-fired power projects, and will extend repayment maturities and reduce interest costs.
Post-period end operational update
Since 30 June 2013, all operating power plant and the Vadinar and Stanlow refineries have performed in line with expectations.
Source: Essar Energy