Opg Power Regulatory News (OPG)

5th June 2018

OPG Power Ventures plc

("OPG", the "Group" or the "Company")

Trading update for Q4, FY18

OPG (AIM: OPG), the developer and operator of power generation plants in India, announces its trading update in respect of the full year ended 31st March 2018 ("FY18").

Summary

· 1.1 billion units in Q4 FY18, up 15% on Q4 FY17;

· Total FY18 generation 4.8 billion units up 10% from 4.4 billion units in FY17;

· FY18 Chennai plant load factor ("PLF") of 77% and 78% for Gujarat;

· Sales tariffs increased by 4% at Chennai plant for FY19;

· 62 MW Karnataka solar projects commissioned and expected to contribute to Group earnings in FY19;

· Gujarat Distribution Companies of the State Electricity Utility ("DISCOMs") no longer levying cross-subsidies to our customers; £7m of dues already recovered by the Group; and,

· Strategic review of Gujarat plant underway following successful resolution of group captive status with DISCOMs; 5% equity interest in OPGS Gujarat ("OPGG") sold;

Arvind Gupta, Executive Chairman of OPG, commented:

"This has been a record year of production for OPG, in which we have operated both our plants in line with our full year guidance. Improvements in the tariffs at Chennai for FY19 have provided us with some additional headroom for next year versus the prevailing coal price which, albeit is still high, is lower than recently."

"With the commissioning of 62 MW solar projects in Karnataka, we now have a diversified portfolio of thermal and renewable assets which is strategically important in the modern environment and a key milestone for OPG. Following the resolution of the significant issues to do with recovering historic cross subsidy deductions made by Gujarat DISCOMs, the Board has decided to review its strategic options for the Gujarat plant and remains focused on the Group delivering strong operational and financial performance, to allow the Group to deliver true value to stakeholders." 

For further information, please visit www.opgpower.com or contact:

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 ('MAR')

Group Operations Summary

Note:

1. MU - millions units or kWh; Mue - millions units or kWH of equivalent power

2. Reported Average PLF based on Mue

Total generation in Q4 FY 18 was 15% higher than in Q4 FY17 and 10% higher in FY18 than in FY17.

Chennai - 6% more units generated in FY18 

(*) - The plant realised an average tariff of Rs5.02 which equates to Rs4.92 net of self-generation tax of Rs 0.1 per unit which is paid directly to the state by group captive customers and will not be included in Company's tariffs and expenses in FY19 which was the case in FY18

Strong generation in the fourth quarter, with a load factor of 82%, meant that the Chennai plants' generation during FY18 was 6% higher than in FY17. The Company expects FY19 PLF to be approximately 80% to 85%, including "deemed" offtake at Chennai and expect the average tariff for full FY19 to be around Rs5.10 per unit. The "Clean Dark Spread", was Rs1.45 per kWh for Chennai in FY18 (FY17: Rs2.63) or £17.00 (FY17: £30.03) on a GBP per MWh basis in spite of the sharp increase in coal prices in FY18.

The Company is pleased to announce that it has negotiated a 4% increase in sales tariffs at Chennai plant for FY19 and, since the year end all of the Group Captive customers in Chennai have renewed their three year contracts.

For FY19, we expect the Chennai plant to continue with its diversified sales mix, contracting the majority of its generation from 414 MW to Group Captive customers and the balance of 74 MW (net) to Tamil Nadu Generation and Distribution Corporation Limited ("TANGEDCO") under the 15 year Power Purchase Agreement ("PPA").

The Company is pleased to report that approximately £31.4 million has been collected from TANGEDCO in FY18, including £19.3 million of TANGEDCO receivables outstanding as at 31 March 2017. Since 1st April 2018 the Company has collected £2 million of TANGEDCO receivables outstanding as at 31 March 2017, with £2.9 million of pending TANGEDCO receivables are expected to be collected in FY 19.

All scheduled interest and principal repayments at Chennai, amounting in aggregate to Rs2.9 billion (£33.8 million) were made during the twelve months ended 31 March 2018.

Gujarat - 23% more units generated in FY18 

The Gujarat plant's generation was up 23% from FY17 to 2.0 billion units. The plant continued to stabilise production of power by achieving a 78% PLF for the year in its second full year of operation, up from 63% a year earlier and on track to rise to 80% in FY19. The plant achieved a record 238 days of continued operations without any outages in FY18.

The plant realised an average tariff of approximately Rs4.19 per unit for FY18 and we expect an average tariff of approximately Rs4.30 in FY19 on account of the addition of new customers at higher tariff. 

The "Clean Dark Spread" was Rs1.03 per kWh for Gujarat in FY18 (FY17: Rs1.37) or £12.00 (FY17: £15.70) on a GBP per MWh basis in spite of the sharp increase in coal prices in FY18.

Interest and principal repayments totalling Rs1.7 billion (£19.3) million have been made during the twelve months ended 31 March 2018 at Gujarat.

Strategic review of Gujarat plant; Sale of 5% equity interest in OPGG

The Board has considered Management's achievements at Gujarat since the project was conceptualised: 

· Building the 300 MW plant from scratch within a disciplined timeframe;

· Constructing the plant sensitively, taking the initial concerns of our community into account in our design, engineering and our choice of technology;

· Resolving issues relating to the completion of the delayed transmission system to evacuate power from the plant;

· Increasing production of the plant to reach our target of 80% load factor, securing an attractive tariff from a diverse range of group captive customers;

· Actively engaged in constructive dialogue with the DISCOMs and bankers agreeing and implementing debt rescheduling to preserve cash; and,

· DISCOMs have stopped levying cross-subsidies and have now released approximately £13 million of FY18 CSS receivables to the customers (out of £40 million of total CSS receivable) and approximately £7 million of dues were already recovered from the customers by OPGG. 

With load factors at the plant performing in line with the best in the industry, withheld cross subsidies starting to come through and a strong and diverse customer group having been established, the Board considers that the OPG team has achieved much with this plant. OPGG is now operating under the group captive model on a standalone basis.

With the Gujarat DISCOMs having commenced the release of the delayed Cross Subsidy Surcharges ("CSS"), the Board has decided to conduct a review of strategic options at Gujarat. The Board's strategic review will occur alongside but separately to the development of a lender-assisted Resolution Plan ("RP") as per the RBI's circular dated 12 February 2018 setting out a revised framework to reschedule the terms of OPGG term loans. These were described in the Company's statement of 13th March 2018. The circumstances leading to the requirement to develop an RP were due to the accumulated impact of delayed recognition of captive power status and the withholding of the CSS.

One of the potential outcomes of the RP could be that the banks convert part of their debt into equity in OPGG and thereby further reduce the Company's ownership of OPGG. Due to the CSS matters at OPGG and the RP, a payment of £5.5 million of term loans in respect of the quarter ended 31 March 2018 is outstanding. 

The Board's strategy is to maximise robust cash flows and to this end, the Group has sold a 5% per cent equity stake in its special purpose vehicle OPGG to a local firm, Bee Electric Power Private Limited ("Bee Electric"), that has already assisted OPGG in resolving several issues raised by the DISCOMS and will continue to assist OPGG in its dealings with DISCOMS, captive consumers and regulators. The 5% equity interest in OPGG will provide long-term incentives for Bee Electric and will better align its interests with those of OPGG. The Group retains the ability to buyback the 5% shareholding at fair value in the future. This transaction reduces the Group's equity interest in OPGG to 46% and does not impact the Group Captive status of the OPGG plant. The Group does not expect any cash flow or dividends from OPGG in the medium term.

OPGG's loss was £13.4 million in FY17 and £9.3 million in H1 FY18. OPGG's net assets value was £25.1 million as at 31 March 2017 as per audited OPG Group's Consolidated FY17 Financial Statements and £14.4 million as at 30 September 2017 as per unaudited OPG Group's Consolidated H1 FY18 Financial Statements. Sales proceeds from selling a 5% equity interest in OPGG of approximately £4,400, being the nominal value of the shares sold and being tax neutral for the Group. The proceeds will be used for the Group's general corporate activities. Further announcements will be made following the conclusion of the strategic review of the OPGG operations.

Coal and Freight costs

The average landed coal price was Rs4,424 per tonne in FY18 (FY17: Rs3,552 per tonne). Following the coal price spike in 2017, coal prices have been weakening since March 2018. Independent expectations are for international coal prices to reduce further in FY 2019 and beyond.

As previously reported, the Company has booked forward around half of its freight requirement for the calendar 2018 year at fixed prices.

62 MW Karnataka solar projects commissioned

The Company is pleased to announce that its four solar projects at Karnataka, which will deliver 62MW, have been commissioned and are being ramped up and are expected to contribute to the Group's earnings in the current year.

Macro trends

Economy

India's gross domestic product is expected to reach US$ 6 trillion by FY27 and India is expected to be the third largest consumer economy as its consumption is predicted by some to triple to US$ 4 trillion by 2025, owing to shift in consumer behavior and expenditure pattern.

With inflation expectations adjusting down, many commentators suggest there could be room for further cuts in interest rates if inflation durably remains below 4%. FY18 annual in inflation rate was 4.36%.

India's GDP grew by 6.6 per cent in FY18 and is projected to strengthen to above 7% in FY19, gradually recovering from the transitory adverse impact of rolling out the Goods and Services Tax. In the longer run, it is expected that GST will boost corporate investment, productivity and growth by creating a single market and reducing the cost of capital equipment.

Power Sector

With electricity production of 1,201.54 BU in India in FY18, India is the third largest producer and consumer of power in the world and the government's goal is to meet the anticipated growth in demand by doubling the current capacity to provide 24x7 electricity to all users. Multiple drivers such as industrial expansion and growing per - capita incomes are leading to that growth demand which is set to continue in the coming years as India seeks to become a global manufacturing hub. India is planning to achieve 40 per cent of its energy output from non-fossil fuel sources by 2030, thereby raising renewable energy installed capacity from 57 GW to 175 GW by 2022. However, the 2015 International Energy Agency's special report forecasts that in 2040 coal-fired power plants will remain the backbone of India's power system.

Outlook

The Board's priority is to ensure that the Group remains focused on making robust returns and maximizing cash flows. To that end, our new solar capacity is expected to generate steady revenues. Our consistently strong performance at OPG's Chennai operations, improvement in tariffs and, expected reduction in coal prices, provide a further credible backdrop for a recovery in the Company's profitability during FY19.