OREANDA-NEWS. Essar Energy plc (LSE: ESSR), the India-focused integrated energy company, today released its interim management statement (IMS) for the quarter ended December 31, 2013.

Q3 FY2014 highlights - resilient performance in tough global refining market environment

Refining and marketing

Vadinar throughput was 33.88 million barrels despite a planned seven-day shutdown in November, against 36.32 million barrels in Q3 FY2013

Vadinar optimised overall crude cost by processing highest ever mix of heavy and ultra-heavy crudes, comprising 98% of total, compared with 84% in Q3 FY2013

Vadinar current price gross refining margins (CP GRM) at USD 7.93/bbl against USD 9.75/bbl in Q3 FY2013 primarily due to lower benchmark margins. Vadinar's premium to IEA Singapore benchmark at an all-time high of USD 9.33/bbl

Re-lifing of Stanlow's Residue Catalytic Cracking unit successfully completed

Stanlow throughput was 5.8 million barrels, down 68% against 18 million barrels in Q3 FY2013 due to major maintenance turnaround and subsequent furnace incident delaying the start-up and impacting distillation throughput

Stanlow CP GRM at USD -2.61/barrel compared with USD 7.22 in Q3 FY2013 due to major turnaround during the quarter, lower benchmark margins and increased production of lower value intermediary products post the furnace incident

Power

Generation totalled 2,464 million units (MU), down from 2,862 MU in Q3 FY2013 primarily due to lower demand at the gas-fired captive plants arising from higher generation costs versus other fuels, offset by higher generation at Vadinar P2

E&P

183 wells drilled at Raniganj as at 31 December 2013. Current production at around 120,000scm/day

Post-period highlights

Power: Stage 2 forest clearance received for Mahan coal block

Operating performance and project update

I. Refining and marketing

Throughput and production from the company's refineries compared to the prior corresponding three month period was as follows, with the nine month data shown separately in annexe 1 at the end of this statement:

Refining and marketing, India

During the third quarter, the Vadinar refinery achieved a throughput of 33.88 million barrels/4.86 million metric tonnes (mmt) compared with 36.32 million barrels/5.14 mmt in the same period last year, a decrease of 7% due to a planned seven day shutdown in November.

Vadinar achieved a CP GRM of USD 7.93/bbl in Q3 FY2014, compared with USD 9.75/bbl in Q3 FY2013. This represents a solid result in the current refining environment being USD 9.33/bbl above the IEA Singapore benchmark margin of USD - 1.40/bbl, which is above our guidance of a sustainable premium of USD 7-8/bbl.

To optimise crude cost, Vadinar processed its highest ever mix of heavy and ultra-heavy crudes, accounting for 98% of its crude diet, compared with 84% in Q3 FY2013. Despite this shift, Vadinar maintained production of higher margin middle and light distillates, which accounted for 84% of the total in Q3 FY2014 versus 85% in Q3 FY2013.

Essar Oil continues to make good progress with its "Optima Plus" programme designed to enhance margins by USD 1.5/bbl over the next three years. This includes increasing hydrogen production to improve unit utilisation, converting VGO to higher value distillates, energy conservation and refinery process optimisation.

Refining and marketing, UK

At the Stanlow refinery in the UK, throughput during Q3 FY2014 fell to 5.8 million barrels/0.77 mmt compared to 18 million barrels/2.40 mmt during Q3 FY2013. This was mainly due to a planned major maintenance shutdown in the quarter and a subsequent furnace incident. As a result, throughput at Stanlow is expected to be approximately 56 million barrels in FY2014 (20.1 million barrels in H2 FY2014), versus 59 million as previously stated.

The furnace incident also resulted in increased production of intermediary products which negatively impacted margins during the period. As of mid-January, business interruption losses are protected under the existing insurance policy. The likely target for completing the furnace repairs is Q2 FY2015.

Stanlow refinery achieved a CP GRM of USD -2.61/bbl for Q3 FY2014 compared with a CP GRM of USD 7.22 in Q3 FY2013 due to the impact of the turnaround on production in October and November, lower benchmark margins and the resulting increased production of intermediary products. Post-turnaround, Stanlow achieved a CP GRM of USD 2.14/bbl in December 2013.

As a consequence of the turnaround, furnace incident and negative CP GRM, Stanlow has had negative cash flow of USD 287 million in the year to date including capital expenditure of USD 170 million. This shortfall has been met by a combination of operating cash flow, extended working capital facilities and equity.

As a result of its financial performance and the weak European refining industry environment, Stanlow is embarking on an estimated USD 100 million cost improvement programme to ensure that the business is able to weather this period of exceptionally poor refining margins. This programme will focus on all aspects of operating, capital and financial costs without compromising safety or reliability.

Stanlow will be mothballing its smaller CD3 crude unit by October this year. This will further reduce fuel oil and naphtha production and improve absolute margins whilst delivering cost efficiencies. Stanlow's yield profile is expected to become around 33% gasoline, 57% kerosene and diesel and 3% fuel oil. As a result, annualised crude throughput is expected to reduce to 71 million barrels per annum.

Kenya

On October 3, 2013, Essar Energy announced that it intends to exit from its 50% owned joint venture business Kenya Petroleum Refineries Ltd (KPRL), which operates the oil refinery in Mombasa, Kenya.

II. Power

Production and availability from the company's main operating power plants compared to the prior corresponding three month period was as follows, with nine-month data shown separately in annexe 1 at the end of this statement:

Essar Energy currently has 3,910MW of operational capacity. During Q3 FY2014, all plant had high availability with generation impacted by high gas prices, low availability of coal at economic prices and transmission constraints at Mahan unit 1. Total generation of 2,464 MU was down 14% compared to 2,862MU in Q3 FY2013.

Captive portfolio

Within the captive generation portfolio, principally supplying power to Essar Steel at Hazira and the Essar Oil refinery at Vadinar, the key measure of availability, which determines revenues, remained very good in Q3 at between 97% and 100%. The ongoing industry-wide issues with low general availability of indigenous gas in India and the high price of imported gas continued to result in higher generation costs. This resulted in lower demand and load factors at the gas-based plants, where the customer takes fuel price and delivery risk.

However, generation was higher at the coal-fired 510MW Vadinar P2 plant, supplying power and steam to the Vadinar refinery, due to the cost advantages of coal generation versus other fuels.

Imported coal plant - Salaya I

Plant availability for the 1,200MW Salaya I coal-fired power plant was 89% in Q3 2014 and availability for GUVNL was 79%. However, the plant load factor was 50% due to low demand by GUVNL. As we continue to receive payments for availability, this low demand has minimal financial impact.

On December 13, 2013, Essar Power submitted its petition to the Gujarat Electricity Regulatory Commission (GERC) seeking tariff revisions to Salaya I Power Purchase Agreements to mitigate the impact of a change in Indonesian coal pricing laws in 2011 and other cost increases. At the first hearing on January 28, 2014 the petition was admitted by GERC and the next hearing is due to take place on February 25, 2014.

Domestic coal plant - Mahan I - 1,200 MW

The 600MW unit 1 at Mahan I had availability of 100% in Q3 FY2014. While the plant load factor was low at 17%, we continued to recover capacity charges. Low power generation of 230MU was primarily due to transmission constraints in the southern grid, which affected supply to Power Company of Karnataka Ltd, and intermittent offtake by Essar Steel.

As at the end of Q3 FY2014, Hazira II (captive to Essar Steel at Hazira) was 86% complete and Paradip (captive to Essar Steel at Paradip, Orissa state) was 76% complete.

Mahan I - 1,200 MW

Dispatch of power from the second 600MW unit at Mahan I is expected by Q3 FY2015, but full load operation will depend upon commissioning the Mahan Sipat Transmission line and securing longer-term domestic coal supply. To this end, Essar Energy announced on February 12, 2014 that it has received final stage 2 forest clearance from the government of India's Ministry of Environment and Forests for its Mahan coal block in Madhya Pradesh. This stage 2 clearance is one of the last major approvals required to develop the Mahan coal block which will supply coal to the Mahan I power project.

Following this stage 2 approval, the company will now be required to sign a mining lease with the state of Madhya Pradesh before mining operations can start. Essar Energy estimates that it will take nine to twelve months to produce first coal and between two to three years to ramp up to the full capacity of 8.5 million metric tons per annum. In the meantime, the company has applied for an allocation of coal under Coal India's tapering coal linkage system in order to provide us with sufficient coal to cover the period until our own mining activities are fully operational. We are continuing to pursue this application.

Currently, the 600MW unit 1 at Mahan I is being operated using coal from Coal India's e-auction market.

Tori I, 1,200MW and Tori II, 600MW

As at the end of December 2013, Tori I was 43% complete and Tori II 17% complete.

Progress continues to be slow pending receipt of necessary forest and environmental clearances for the two nearby coal blocks, Chakla and Ashok Karkata, which will supply captive coal to the Tori projects. While the Chakla block is now at an advanced stage of stage I forest clearance, clearances for the Ashok Karkata block continue to proceed slowly. Completion of the Tori projects will only occur when a reliable and cost-effective supply of coal has been secured from these two coal blocks.

As with all of its captive coal projects, Essar Energy remains absolutely committed to setting the highest standards in protecting the rights and livelihoods of nearby villagers, restoring forest cover following mining work and conserving wildlife

The Supreme Court of India is currently reviewing the validity of the process by which coal mines were allocated by the government of India to companies for their end use projects. Essar Energy is working with the Ministry of Coal to validate the allocation of the blocks awarded to it (Mahan, Chakla, Ashok Karkata and Rampia) and to clarify the status of the approvals required to develop the mines.

III. Exploration and production

At Raniganj, the coal bed methane block in West Bengal which is Essar Energy's first to be brought into production, 183 wells have been drilled as at December 31, 2013. Current production is around 120,000 scm/day and although we have obtained phase III environmental clearance to drill up to 650 wells, our near term priority remains drilling up to 350 wells to achieve target peak production of c.3 million standard cubic metres per day (mmcmd). The remainder will be drilled over the likely 20 year lifetime of the field in order to maintain production.

On January 10, 2014, the Indian Ministry of Petroleum and Natural Gas published its Domestic Natural Gas Pricing Guidelines, 2014 which will come into effect on April 1, 2014. This will lead to an increase in the price of domestic natural gas from USD 4.2/mmbtu to c.USD 8.4/mmbtu, providing the company with further incentive to develop its 10tcf of CBM resources.

IV. Debt update

Having completed the majority of its capital expenditure programme, Essar Energy is now focused on improving its operational and financial performance and is currently implementing asset optimization and refinancing programmes to improve margins, cash flow and profitability.

At the end of Q3 FY2014, Essar Energy had underlying gross debt (excluding working capital loans) of USD 6,841 million and underlying net debt of USD 6,701 million, which is in line with our plans. The underlying net debt at the end of Q3 FY2013 was USD 6,809 million.

Essar Oil Limited, Essar Energy's 90% owned subsidiary, has to date dollarized USD 900 million of Rupee debt. Essar Oil Limited still intends to dollarize in excess of USD 2 billion of its debt, but the process is taking longer than originally anticipated. This will reduce risks within the business, reduce interest costs and extend repayment maturities to better match the underlying asset life of the company's Indian refinery. For every USD 100 million refinanced, the company is expected to benefit from approximately USD 6 million of interest cost savings.

Essar Energy continues to make good progress extending debt maturities in its power business. To date in FY2014, Essar Power has raised c.USD 452 million of Rupee bonds which were used primarily to repay current debt obligations and towards project expenditure. The Reserve Bank of India recently announced an initiative designed to protect infrastructure projects impacted by delays in government approvals by allowing lenders to move their repayment schedules by up to two years from the original date of commencement of commercial operations (DCCO). Essar Power has already applied to lenders of its Mahan I (1,200MW), Hazira II (270MW) and Paradip (120MW) projects and also its Mahan transmission project for pushing out the repayment schedule. If successful, these actions would defer USD 150 million of repayments at these projects over the next two years.

In the short term, Essar Energy will seek to reduce capital expenditure by focusing only on essential maintenance, asset optimisation and committed project expenditure.

V. Post-period end operational update and subsequent events

Since December 31, 2013, the majority of our operating power plant and the Vadinar refinery have performed in line with expectations. The Stanlow refinery continues to operate below optimum levels due to the furnace incident. In addition, Stanlow suffered an outage in February as a result of a fault on an electrical substation that feeds the power station and provides the site with steam and power. The fault was found and corrected within a few hours and the site re-started immediately.

The 600MW Mahan I power project in Madhya Pradesh stopped operations on January 29 as it responded to concerns raised by the Madhya Pradesh Pollution Control Board relating to the disposal of fly ash. All concerns were resolved promptly and the plant has now received clearance to recommence operations.

On January 24, 2014 an incident occurred at the 1,200MW Salaya I power project involving the fatalities of two contractual workers while conducting routine maintenance to one of the plant's two boilers. A third contractual worker suffered non-life threatening injuries. While the precise cause of the accident is still being investigated, operations at Salaya have recommenced following an outage of 20 days. The company is taking all actions necessary to ensure that an incident of this nature does not reoccur. Health and safety remains the company's number one priority.

On February 12, 2014, Essar Energy announced that it has secured stage 2 forest clearance from the government of India's Ministry of Environment and Forests for its Mahan coal block in Madhya Pradesh.

On February 14, 2014, Essar Global Fund Limited ("EGFL"), the holder of 78.02% of the issued shares of the company, announced that is considering making, either itself or as part of a consortium, an offer for the shares in the company it does not already own and for the 4.25% convertible bonds due 2016 issued by Essar Energy Investment Limited and convertible into ordinary shares in the company. EGFL also stated that, until there is certainty as to whether any offer will be made, it will not undertake any transactions in the shares of the company to facilitate meeting the FTSE UK Index Series minimum free float requirement. On February 17, EGFL issued a further announcement stating that any offer, if made, would comprise an offer for the shares in the company at a price of 70 pence per share in cash, and an offer for the convertible bonds at a price of 80 cents. There is no certainty that any offer will be made.

Following receipt of the proposal from EGFL, Essar Energy has formed an independent committee of the board (the "Independent Committee") to consider its terms. The Independent Committee comprises Mr Philip Aiken AM (as Chairman of the Independent Committee), Mr Sattar Hajee Abdoula, Mr Subhas C Lallah, Mr Steve Lucas and Mr Simon Murray CBE (each of whom the board of the company considers to be free from conflicts of interest with regard to the proposal). The members of the Independent Committee will act in accordance with their duties as directors and, in particular, in order to protect the interests of the company's minority shareholders.

VI. Corporate governance

In December 2013, Mr Mark Lidiard, Director of Investor Relations & Communications, informed the company of his intention to resign from the Group. The company is currently undertaking a search for his replacement. Essar Energy would like to thank Mr Lidiard for his contribution to the Group since listing in 2010.

The nine month data for Vadinar showed an increase of 3% in throughput despite a planned seven day shutdown in November, to 106.78 million barrels/15.18mmt from 104.35 million barrels/14.69mmt, due to progress under the "Optima Plus" refinery optimisation plan. CP GRMs averaged USD 7.27/bbl over the nine months to December 31, 2013, compared with USD 7.57/bbl in the comparable period a year earlier due primarily to lower benchmark margins.

The nine-month data for Stanlow showed throughput at 42.1 million barrels/5.6mmt, down 26% compared with 57.2 million barrels/7.6mmt in the comparable period a year earlier due to the major turnaround and subsequent furnace incident. CP GRMs averaged USD 3.98/bbl over the nine months to December 31, 2013, compared with USD 8.17/bbl in the same period last year due to lower benchmark margins and the major turnaround period.