(OPG) OPG Power Ventures

14 December 2011

OPG Power Ventures PLC

("OPG" or the "Company")

Unaudited Results for the Six Months ended 30^th September, 2011

Higher output from flagship asset, growth projects remain on track

OPG Power Ventures PLC, the developer and operator of group captive power plants in India announces its unaudited results for the six months ended 30^th September 2011.

Financial Highlights

·      Revenue £23.85m up 166% 

·      EBITDA £6.34m up 34% 

·      Profit attributable to shareholders up 35% and EPS up 11% (on a higher capital base)

·      Average tariff achieved in the period of Rs 4.72/KWh (30 Sep 2010: Rs 4.80/KWh)

·      Contract signed for 53 MW at Rs 5.05/Kwh for period October 2011 to May 2012

·      Cash & cash equivalents of £66.84m; long- term borrowings of £62.78m

Operational Highlights

·      No coal shortages experienced during the period

·      Delivered power up 190% on comparative period in 2011 and 8.5% on preceding six months

·      77 MW Chennai I at average 91% PLF delivering 15% more units than preceding six months

·      Accelerated delivery of 77 MW Chennai II project - expected in Q2 2012

·      80 MW Chennai IV brownfield project - construction and equipment delivery commenced

·      Coastal  Regulatory Zone (CRZ) environmental clearance for 300 MW Gujarat project

Commenting on the results, Mr M C Gupta, Chairman said: "I'm pleased to report that OPG has continued its expansion programme and announced further growth during this period that keeps us on track to achieve our targeted capacity of 1,250 MW by 2015.  Our current trading environment remains challenging but during the half year OPG demonstrated the resilience and flexibility of our assets and our operating model, both of which I referred to in the 2011 Annual Report.  I commend the strength of our management team in optimising the performance of our flagship asset, 77 MW Chennai I, and in doing so, working hard to restrict the impact of current external headwinds.  Concurrently, the focus has been maintained on our goal of delivering 1,250 MW of profitable generation capacity and as much of these growth projects are planned to be replicas of Chennai I, the optimisation of that plant strengthens OPG's long term prospects further. 

"We are confident about our ability to maintain our operating margins through the remainder of the year.  Most importantly, with our growth projects on track and the fundamentals of the power sector in India remaining intact, I believe we continue to be well placed for the longer term.  This is particularly so given the positive structural developments now taking place in our sector such as those relating to a move to more realistic utility power tariffs."

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Disclaimer

This announcement does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for any securities. The making of this announcement does not constitute a recommendation regarding any securities. Certain statements, beliefs and opinions contained in this announcement, particularly those regarding the possible or assumed future financial or other performance of OPG, industry growth or other trend projections are or may be forward looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "plans", "goal", "target", "aim", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond OPG's ability to control or predict. Forward-looking statements are not guarantees of future performance. No representation is made that any of these statements or forecasts will come to pass or that any forecast result will be achieved. Neither OPG, nor any of its associates or directors, officers or advisers, provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this announcement will actually occur. You are cautioned not to place undue reliance on these forward-looking statements. Other than in accordance with its legal or regulatory obligations, OPG is not under any obligation and OPG expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

No statement in this announcement is intended as a profit forecast or a profit estimate and no statement in this announcement should be interpreted to mean that earnings per OPG share for the current or future financial years would necessarily match or exceed the historical published earnings per OPG share.

Chief Executive's Review

During the period, OPG continued to make significant progress towards achieving its targeted capacity of 1,250 MW by 2015.  The company announced an additional 80 MW brownfield project, accelerated the delivery of the 77 MW Chennai II and identified development efficiencies achievable through the combination of other projects at Chennai.  Furthermore, construction at the 300 MW Gujarat was commenced.  All growth projects remain on track.   

In the period under review, OPG has demonstrated the merits of a flexible group captive/short term sales model which secure for the company the best prices available in the market.  This is particularly important as it has helped to weather the impact of external factors upon our business.  In addition, we have a stronger expectation of higher tariffs both in the group captive and short term markets following structural changes in our industry that are now under way and to which I refer in more detail below.    

Our flagship asset, 77 MW Chennai I, the design and construction of which is being replicated in our other projects, performed particularly strongly delivering 15% higher output of power compared with the immediately preceding six month period. 

Increased revenues across operations in the period compared to the corresponding period of the prior year reflected the operation of Chennai I for the whole of the period.  Average tariffs achieved per kWh of Rs 4.72 were similar to the corresponding period in the prior year, re-affirming the advantages of our flexible business model.  This notwithstanding that the average tariff was lowered as a result of sales to TNEB between June and September 2011, currently being booked at a tariff of Rs 3.80, a rate that the Company continues to challenge. 

Gross margins remained healthy at 34% and the fuel-flexibility of Chennai I in particular enabled us to maintain a high level of production and gross margins in the wake of increased average international coal prices and the imposition of a 5 per cent import duty by the Indian government. 

Rising interest rates and a sharply appreciating US dollar against the Indian Rupee also impacted power producers including ourselves.  Our current expectation, based on certain market data, is for present interest rates to prevail for the remainder of the financial year trending downwards thereafter and for the Indian Rupee to remain close to prevailing levels for the remainder of the year.  Notably, capital equipment purchases are principally denominated in Indian Rupees and accordingly projects remain within budget.

Overall, the strong operating performance of Chennai I eclipsed that of our smaller, legacy plants in which the group's economic interest is also much smaller.  Accordingly, despite a challenging trading environment, OPG delivered earnings per share of 0.61p in the period, on an enlarged equity base of 351 million ordinary shares.

Most importantly, we remain confident in our ability to bring development projects on-line within our stated timeline and budget, leveraging our significant in-house capabilities and experience.  OPG remains on track to achieve its target of 742 MW of capacity by 2013 and a total 1,250 MW of capacity by 2015.

Structural change on the horizon - expected tariff changes are good for OPG

State utilities, constituting the country's dominant power producers and distributors, have held their price lines for the sale of power virtually static in the last several years notwithstanding cost and supply pressures.  This has had the effect of affecting margins for all producers especially private players with long term PPA's with fixed pricing over a 20-25 year period.

Looking ahead, however, there are clear signs that the long awaited structural changes in the sector, primarily in the form of realistic tariffs and pricing by the utilities, are under way.  Given the stretched financial position of the state utilities, the central regulator has directed state regulators to ensure that tariffs are reviewed annually.  Several state utilities have already, in the last few weeks, filed applications with their state regulators for significant tariff increases.

In Tamil Nadu, where the State Electricity Board's ("SEB") financial position is considered to be particularly acute, the SEB has acknowledged the position and in seeking to achieve partial redress for accumulated losses has filed an application with the state regulator for a minimum tariff increase of 25 % over current levels for industry.  In addition, the SEB has asked that the regulator permit it to pass on fuel price increases to its customers by means of a monthly surcharge.  If adopted in the requested form, we expect short term tariffs including tariffs contracted with the SEB to move upwards correspondingly and for OPG to see the benefit of this.  Tariffs charged to industrial customers under the group captive model are correlated to SEB rates and should therefore also rise. 

We expect that any new pricing will apply, following regulatory decisions, by April 2012.  OPG welcomes the initiatives under way as a realistic tariff regime is one that will lead to a healthier utility sector.

India's power current power balance remains unchanged

The period under review saw no substantive improvement in the country's power supply position with peak deficits of some 10.6 % at the end of September, 2011.  Addition of new capacity during the current Five year Plan (April 2007 - March 2012) up to the end of September 2011 was 50 GW, indicating that no more than 65 % of the target capacity of 78 GW could be achieved by the end of the Plan period.  Power deficits are expected to remain at 10-12% in the medium term due to delays in the scheduled capacity to be commissioned and OPG is well positioned to benefit by bringing additional capacity in the next 24 months.

Operational Review

Total power delivered ahead of prior periods as our flagship asset performed well

The Group delivered a record 405.2 GWh of power to its customers compared with 139.6 GWh in the corresponding period of the prior year and 373.5 GWh in the six months ended 31 March 2011.  This represents an increase of 190% on the prior year and 8.5% on the immediately preceding six month period.  This increased level of output and the resulting increased contributions partly mitigated the impact of cost increases such as coal, exchange rates and interest rates.

77 MW Chennai I

Following its stabilisation in August 2010, this plant has operated at consistent output levels averaging 85%.  During the period under review the plant operated at an average load factor of 91%.  About 50 MW of the output from this plant, now in its second year of operations, is being sold to the Tamil Nadu Electricity Board with the remainder being sold to industrial customers under short term contracts.  The current financial year, to 31 March 2012, is expected to see the first full year contribution from this plant.

Since the commencement of operating at the 77 MW plant, supplies of linkage coal are being received as committed.  Unlike other producers OPG is not affected by any shortages as the proximity of our plants to ports and the capability of our boilers means we are able to import coal.  Since OPG boilers can burn either exclusively imported high moisture coal or Indian coal or a blend of the two coals in any proportion, our new plants coming on stream in 2012 and 2013 are also expected to be insulated from in this way.  Accordingly, we have not experienced and currently do not anticipate any coal supply shortages at our presently slated operations and developments.

25.4 MW Natural gas plant, Mayavaram

The Mayavaram gas fired plant, in which the Company has a 44% economic interest, whilst remaining profitable, generated lower output during the period due to limited availability of gas.  We expect the operations of this plant to continue to at current levels for the remainder of the year and for margins to be affected by a 15-20% rise in input gas prices going forward.    

10 MW Waste heat plant, Chennai

Output levels at the 10 MW plant, in which the Company has a 33% economic interest, were lower at about 55 % of capacity during the period due to limited availability of quality iron ore for the supplying sponge iron (waste heat) furnaces during the greater part of the first half.  The lower quality ore resulted in reduced heat output and hence power production.  We expect the average to remain at this level until normalisation of waste energy supplies from the sponge iron plant (not owned by the Company). 

Whilst their performance is currently consolidated as part of the Group's results, due to the Group's low economic interest, the impact of the natural gas and waste heat units on Group earnings per share has become less material now than previously and this trend is expected to continue as each of our projects is commissioned. 

Funded development projects of 629 MW are progressing on schedule to achieve 1,250 MW by 2015

In all of the projects below, land and environmental approvals have been received and equipment ordered.  Equity and fuel supply arrangements are in place for all the projects except Chennai Phase IV, for which a coal linkage is being progressed.  With the principal risks mitigated, the Group's priority is to deliver 742 MW on-time and budget by 2013 and to increase its generation portfolio to 1,250 MW by 2015.

Chennai

OPG is implementing development plans to expand generation capacity at its Chennai site from the present 77 MW level to a total of 394 MW by 2013.

77 MW Chennai II:The construction of this 77 MW unit, a twin of the existing operational unit, has made further appreciable progress and, as announced previously, is expected to see accelerated commissioning during the second quarter of calendar 2012.

160 MW Chennai III: This relates to the projects (originally conceived as two separate modules of 80 MW each) which will now be developed as an upgraded single unit of 160 MW.  Construction work relating to this unit will commence shortly.  Environmental approvals are already held for this development for which the necessary equipment has also been ordered.  The unit is on course for commissioning in 2013.

80 MW Chennai IV:Construction of this additional 80 MW unit, announced in July 2011, has commenced and commissioning is anticipated in calendar year 2013.  Environmental approvals have been received, construction work at site has commenced and equipment delivery commenced for this additional unit on the present site.  The equity component of the capex for this project will be met through internal cashflows.

300 MW (2 x 150) Gujarat

Formal CRZ approval was received in September 2011 from the Ministry of Environment and Forests ("MoEF") for proposals in connection with sea water intake and outfall for this 300MW (2 x150) power project in Gujarat.  Construction at the site has commenced and deliveries of equipment are expected to start shortly.  Some local objections relating to the environmental clearances already obtained are in the process of being resolved and have not impacted our construction schedule.  Accordingly, the project is still expected to be commissioned in calendar 2013.

Financial Review

OPG's revenue increased by 166 % to £23.85 million (£8.95 million Sep 2010) in the six months ended 30 September 2011.  Gross Profit increased by 86% to £8.04 million (£4.31 million Sep 2010).  This reflected the operation of Chennai I for the whole of the period ended 30 September 2011. 

Average tariffs comparable with prior period and expected to improve in second half

The average tariff achieved on all sales in the first six months of the year was Indian Rupees (Rs) 4.72 per kWh.  The average tariff in the period has been lowered as a result of sales to TNEB between June and September 2011 currently being booked at a tariff of Rs 3.80, a rate that continues to be challenged by the Company. 

Following a recently announced order issued by the Tamil Nadu Electricity Regulator to the Tamil Nadu Electricity Board ("TNEB"), the Company has now signed an agreement with TNEB for the supply by the Company of 53 MW between October 2011 and May 2012 at a price of Rs 5.05 per kWh.  On this basis and taking into account recent sales to industrial and commercial customers, the Company currently expects average tariffs across all power sales for the year ending 31 March 2012 to be approximately Rs 4.90 comparable with last year's average tariff of Rs 4.95 per kWh.

Flexible revenue model - Resilient gross margins expected to be maintained

Gross margins were 34%, notably taking into account increased coal prices and adverse exchange rate movements which also have an impact on the cost of coal.  The fuel-flexibility of Chennai I in particular enabled us to optimize our coal purchases even with some additional cost resulting from the imposition of a 5 per cent import duty by the Indian government.

The period since July 2010 has witnessed a steep and persistent depreciation of the Rupee relative to the US Dollar and this has had the effect of increasing fuel costs by about 15 % to 20 % for the rest of the year.  Given that OPG revenues are based on short-term contracts ranging around 5 per Kwh, the Company has been able to absorb this increase better than other producers most of whom have a lower average revenue base under the long term PPA model.

Interest cost

Interest rates have increased from c.13% to c.15.5% in the last 12 months, in response to rising inflation rates, and have impacted businesses and in particular the infrastructure sector across India.  There is a widely publicized expectation that interest rates may start to come down in the next fiscal year.   Due to the capitalization of project related interest costs, the impact on our earnings is deferred until the amortization of such projects commences.  

Translation effect

Results for the period have also been affected by the impact of an appreciation in GBP versus Indian Rupee, the group's functional currency, from Rs 69 to Rs 73.5.

Outlook

Our trading environment remains a challenging one with many of the macro features described above still in existence.  However, we believe some of the structural changes that are appearing on the horizon, such as those potentially relating to tariffs, are likely to be helpful to our industry.  Most importantly, our projects remain on track and accordingly we remain positive about the Company's long term prospects.  Having taken steps to optimize the performance of our key "model" asset and having established a significant contract for sale of power during the remainder of this year we remain confident about our ability to maintain our operating margins during the rest of the year.

We are proud of the in-house capabilities built through the Chennai I project in both project execution and plant operations and thank our team in their unremitting efforts. 

We would also like to thank our shareholders for their support and I look forward to the reporting the Company's continuing progress upon completion of the second half of the financial year.

Arvind Gupta

Chief Executive