Macquarie Research, :: Essar Energy - A diversified energy play

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Essar Energy
A diversified energy play
Event
 Part of the Shashi Ruia-led Essar Group, Essar Energy is an India-focussed
company with interests spanning Power, Oil and Gas value chain.
Power Business: The company’s power business comprises 1600MW of
existing capacity, which is estimated to increase to 11,470MW over the
next five years.
Oil Business: Oil and gas businesses of the company are operated
through Essar Oil – a listed entity on the Indian stock exchanges.

Impact
 Power business capacity growth: Projects in its growth pipeline comprise
8,070MW of under-construction projects along with 1,800MW of projects
under development, taking the combined capacity to 11,470MW over the next
five years.
 Execution capabilities: With Essar’s in-house EPC capabilities, there is less
chance of margin leakage. According to the management, the group’s EPC
capabilities are sufficient to cater to all the projects under construction across
Gujarat, Chhattisgarh, Orissa and Jharkhand.
 Low merchant exposure: Relative to JSW Energy and Adani Power, with
none of its existing capacity is exposed to merchant power sales.
 High amount of captive sales: Around 1/3 of power sold (for plant operating
+ under construction) is expected to be sold to captive users - namely Essar
Steel. All transactions within group companies take place at arm’s length.
 Gas fired plant: Relative to Indian Power comps, Essar Power has a
reasonable amount of gas (1,015MW in operation) and refinery residue-fired
plant (120MW in operation).
 Oil and gas business present across the entire value chain: The oil and
gas business operates 17 blocks diversified across India, Australia, Indonesia,
Madagascar, Nigeria and Vietnam. This apart, the division also operates a
refinery with a current capacity of 10.5mmtpa with a throughput capacity of
14mmtpa (300,000bpd). With a pan-India presence of 1,376 retail outlets, the
company markets and sells its products through these outlets. Essar Energy
plans to increase its outlets to 1,700 by end March, 2011.
 Captive coal: The biggest short-term risk in our view is the development of its
captive coal block (falls under 'no-go' mining zone), including the coal block
pegged to fuel the Mahan project.
Outlook
 We’ve provided a qualitative assessment of Essar’s capabilities and power
growth portfolio.


Essar Energy Aide Memoire
Questions for Management
1. Which projects still have land acquisition and environment/forest clearance outstanding?
2. What alternative coal sources are you exploring for the Mahan project? We hear that timing of the coal development could
be threatened due to a slow partner (owning 40% of the block). Is this true or do these challenges exist? (This is the key
risk in FY12 – the plant is likely to be ready but there is delay around the coal development)
3. What is the pass through ability among your PPAs for inflation and fuel costs?
4. Around 20% of power sold is expected to be sold into the merchant market. What are your merchant power price
assumptions? Also, ~1/3 of power sold is expected to be sold to captive users (namely Essar Steel). How is the
pricing/margin determined?
5. Can you describe the power evacuation strategy for merchant volumes? (750MW from Maha-I, 200MW from Salaya-I and
180MW from Tori-I). Are these in place or are transmission lines being constructed?
6. What is the financing structure (debt/equity split) for new projects? Debt drawn till date against respective projects and the
maturity/instalment repayment structure? What will happen in the event there are project delays, for e.g due to captive
block not in time – How will you pay debt costs?