Essar Energy may shelve plan for three power plants

Owing to difficulties in sourcing fuel for its coal-fired electricity plants due to continued delays at government level on coal block clearances, Essar Energy may shelve plans for three power projects. The news comes even as weaker refining margins and depreciation of rupee in addition to the Supreme court ruling on a sales tax deferment scheme weighed heavily on Essar Energy Plc’s full year full year financial results.

The company said as it awaited government clearance for it to be able to start mining its own coal, it was having to source higher cost coal from outside India to fuel its power stations. As a result, it might shelve plans for three power projects which entail $3.1 billion of investment. “We have decided to regulate the capital commitment and progress of three of our power projects-- Salaya II, Salaya III and Navabharat I, totalling 2,970Mw. Construction of these will now progress only against specific milestones,” Essar Energy Plc’s Chief Executive Officer Naresh Nayyar said over a conference call.

The company reported a net loss of Rs 2,841 crore ($568.2 million) for the full year, compared with a profit of Rs 1241.5 crore ($248.3 million) a year ago.  The company said profits were also badly impacted by the rupee's 13 per cent depreciation against the dollar since August. It said it has taken a $970 million exceptional adjustment in its 2011 financials to reflect a reversal of the sales tax benefit.

On January 17, the Supreme Court rejected the company's 125 per cent sales tax deferment benefit claim on its investment in the Vadinar refinery project. The company has already filed a review petition on the same. Nayyar said, “We were clearly disappointed that the Supreme Court of India set aside an earlier decision of the High Court of Gujarat which enabled us to benefit from a sales tax deferment scheme. We are seeking a review of this decision. We are also engaged in discussions with the Gujarat government regarding repayment of the amount due in instalments.”

“We have filed a review petition and we are taking necessary steps to ensure that we have adequate liquidity and funding to make the repayments. We have $380 million available through Essar House and Essar Oil is in progress of arranging  a new corporate loan facility,” Nayyar added.
 
“In addition, Essar Oil has announced it is proposing to issue $600 million worth of fresh equity over next 12-15 months. This will improve the networth and liquidity of Essar Oil and also increase the public holding of Essar Oil shares to around 25 per cent, in line with Sebi requirements,” Nayyar said.

Nayyar added that 2011 was a challenging period in terms of delivery of Essar Energy’s power generation growth projects. “There have been continued delays at government level on coal block clearances to allow Essar Energy to start mining the coal blocks previously allocated to us and adjacent to our Mahan and Tori power projects,” he said.

The company said that it is also looking at converting the FCCB which is almost Rs 1,400 crore into equity. Essar Oil’s share was down 7.49 per cent at Rs 61.10 on the Bombay Stock Exchange.