Essar Energy Annual Reports and Accounts

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CONTENTS

01 Highlights02 Chairman and Vice Chairman’s statement04 Chief Executive’s report06 Essar Energy at a glance08 Board of Directors11 Senior management team12 Our strategic position14 Power business16 Exploration and Production business18 Refining and Marketing business20 Market overview24 Our strategy and performance26 Operating review32 Corporate responsibility38 Financial review44 Principal risks and uncertainties50 Directors’ report54 Corporate governance report61 Remuneration report65 Statement of Directors’ responsibilities66 Independent auditors’ report67 Consolidated income statement67 Consolidated statement of comprehensive income68 Consolidated balance sheet69 Consolidated statement of

changes in equity70 Consolidated statement of cash flows71 Notes to the consolidated

financial statements111 Company balance sheet112 Company statement of

changes in equity113 Company statement of cash flows114 Notes to the company financial statements116 Appendix 1116 Appendix 2118 Glossary120 Shareholder information

http://www.essarenergy.com

www.essarenergy.com

Essar Energy plc Annual report + accounts 2010

Let’s begin


Essar Energy plc is a world-class, low-cost, integrated energy company focused on India and positioned to capitalise on India’s rapidly growing energy demand. We have an established track-record and US$12 billion of assets across the power and oil and gas industries.

Essar Energy plc and its subsidiaries (the ‘Group’) were created by combining the existing energy portfolio of the Essar Group, a diversified Indian business group established over 40 years ago.

Essar Energy plc Annual report + accounts 2010c

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Revenue US$million

$10,005.6m 42%

10,005.6 7,023.8

1009

Capex spent1 US$million

$2,555.0m 430%

2,555.0 482.3

10

1 Excluding intangibles.

09

Profit before tax US$million

$365.5m 28%

365.5 285.7

1009

CP4 GRM5 $/bbl

$6.6/bbl 57%

6.6 4.2

10

4 See pages 40 and 116 for a definition. Note CP EBITDA presented above is on a Group wide basis.5 Including sales tax benefit.

09

EBITDA2 US$million

$718.9m 8%

718.9 663.7

1009

2 See page 39 for a definition.

Gearing3 %

45.9%

45.9 59.8

10

3 Net debt/(net debt + total equity).

09

Key performance indicators

HighlightsCompleted IPO to raise net proceeds of US$1.8 billion and ̧entered FTSE 10016 major growth projects under execution or advanced stages ̧of developmentCompleted convertible bond offering to raise US$550 million ̧(February 2011)

powerSolid operating performance in line with expectations – 61% ̧EBITDA margin (2009: 54%)Completed construction of 380 MW Vadinar P1, within budget ̧8,070 MW power generation projects under construction: ̧2,910 MW to commence operations in 2011Coal block awaiting clearances – contingency plans in place ̧

exploration and productionSigned contracts for 4 Indian Coal Bed Methane blocks ̧with estimated resources of over 7.6 tcfRaniganj producing about 30,000 scm/day from ̧19 production wells

refining and marketingRecord throughput from Vadinar refinery at 14.7 mmtpa ̧Refinery phase 1 expansion to 18 mmtpa – mechanical ̧completion due mid 2011Refinery optimisation to 20 mmtpa by September 2012 ̧Exclusivity agreement and US$350 million offer for Stanlow ̧refinery (February 2011)

company overview01 Highlights02 Chairman and Vice Chairman’s

statement04 Chief Executive’s report06 Essar Energy at a glance08 Board of Directors11 Senior management team12 Our strategic position

business review14 Power business16 Exploration and Production business18 Refining and Marketing business20 Market overview24 Our strategy and performance26 Operating review32 Corporate responsibility38 Financial review44 Principal risks and uncertainties

Governance50 Directors’ report54 Corporate governance report61 Remuneration report65 Statement of Directors’ responsibilities

financial statements66 Independent auditors’ report67 Consolidated income statement67 Consolidated statement of

comprehensive income68 Consolidated balance sheet69 Consolidated statement of

changes in equity70 Consolidated statement of cash flows71 Notes to the consolidated

financial statements111 Company balance sheet112 Company statement of

changes in equity113 Company statement of cash flows114 Notes to the company financial

statements

116 Appendix 1116 Appendix 2118 Glossary120 Shareholder information

40

39

116


W elcome to Essar Energy’s first annual report as a publicly

listed company. Despite listing in volatile market conditions against a backdrop of a challenging global economic and financial environment, we are pleased to report that your Company has performed well. At the end of 2010 our share price had risen 38.1% from the listing price of 420 pence, compared with a rise of 6.2% for the FTSE 100 over the same period – a creditable performance.

The global economic outlook is improving even though the recovery in the developed world remains fragile. India however, continues to stand apart, along with other emerging economies, and deliver solid growth due to its high domestic consumption demand. As demand in India grows, so will its energy needs and we are creating energy assets that are critical to the economic development of India. We believe that the fundamentals driving Indian growth are robust and as a result, it is clear that the long term outlook for Essar Energy remains strong.

Government projections indicate that the Indian economy is set to grow at over 8% this financial year. All policies of the Government rest on the premise that the domestic economy will see a high demand for goods and services as India modernises and industrialises further. While there is some concern regarding inflation, the Indian Chief Economic Advisor recently made a statement that food inflation will come down to 7% from the present 10%. Most macroeconomic analysts continue to believe the India growth story is intact and the only possible threat is an uncontrolled increase in global oil prices.

strategyOur strategy is clear; to create a world-class, low-cost, integrated energy company focused on India and positioned to capitalise on India’s rapidly growing energy demand. While the focus is on India, Essar Energy will also pursue opportunities overseas which support our strategy and deliver value to our shareholders. To deliver our strategy we will; optimise the performance of all our existing assets; deliver growth through a variety of green-field and brown-field power and oil and gas projects; leverage our skills and Indian asset base to identify further growth opportunities; and, act as a good corporate citizen with respect to the health and safety of our employees, the communities in which we operate, and the environment. The delivery against this strategy will provide a more predictable business performance over time which in turn, underpins the creation of value for our shareholders, customers, employees and, importantly, the communities around our operations.

We are happy to inform you that during the year, your Chief Executive, Naresh Nayyar, and his team have successfully focused on delivering in line with the above stated strategy. This has resulted in a strong production and cost performance as well as progress on our significant pipeline of growth projects.

We are also happy to share that as a part of seeking opportunities in

chairman and vice chairman’s statement

“We are creating energy assets that are critical to the economic development of India.”

Delivering against strategy


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overseas markets, we announced an exclusivity agreement with Shell UK Limited in February 2011 in relation to an offer for the proposed purchase of the oil refinery and other associated assets at Stanlow, near Ellesmere Port, Cheshire, for a cash consideration of US$350 million. The acquisition of the high complexity Stanlow refinery, which is the second largest refinery in the UK, will give Essar Energy direct access to the UK market, is aligned with the Company’s strategy to provide options for the export of refined products from the Vadinar refinery in India, and is being acquired at a competitive price when compared to other recent comparable refinery transactions. The acquisition will be conditional on, amongst other items, the approval of Essar Energy’s shareholders at a general meeting and is expected to be completed in the second half of 2011.

While we continue to deliver well against our plans, we are seeing some delays in certain regulatory approvals that could impact the financial and operating performance of the Company. However, timely receipt of approvals is a key risk for all companies operating in India, and other developing economies. More details on some of these items are given in the Principal Risks and Uncertainties section of this report.

While the health and safety performance at our operational plants was satisfactory, our overall progress in this critical area can be further improved. 2010 was declared as the Year of Safety and during this period the Vadinar refinery achieved more than 1,000 days and over 18 million man hours without a lost time incident. While the Board is pleased with these results at our operating plants, our progress in the area of health and safety, in particular, remains a focus at both our construction and operating sites, and we remain committed to improving our performance in this area.

board governanceEssar Energy’s Board is committed to the highest standards of corporate

governance and advancing the interests of all shareholders equally. The Directors of Essar Energy were all appointed ahead of our Listing on 7 May 2010. The Board is comprised of four independent directors and three non-independent directors, including your Chief Executive who is the sole Executive Director. The Board is committed to having a majority of independent directors who will bring relevant knowledge and experience to the Company.

In line with the principles of the Combined Code, the Board has established an Audit Committee, a Remuneration Committee, a Nominations and Governance Committee, a Health, Safety and Environment Committee and the first report on these Committees is provided in the Corporate Governance report.

peopleOne thing that always impresses us is the quality of the people throughout Essar. Our strategy is built upon creating world class assets, but our results will be a function of the quality of the people constructing, operating and managing these assets.

Naresh Nayyar is a talented and experienced Chief Executive and he has developed a strong and diverse team with a depth of talent to support him. On your behalf, the Board would like to thank Naresh and everyone involved with our Company for the contribution they have made in making our first year as a ‘plc’ so successful.

ravi ruiaChairman

prashant ruiaVice Chairman

18 March 2011

Delivering against strategy Key milestones

may 2010Essar Energy lists on the London Stock Exchange,becoming the largest primary offering in the London market since 2007

June 2010Essar Energy enters the FTSE 100 Index, creating additional interest in the shares of Essar Energy and increasing the liquidity of the Company’s shares

June 2010Essar Energy declared winner of four CBM blocks, comprising of 2,233 sq. km of exploration acreage and in-place prospective resources of over 7.6 tcf of CBM gas

July 2010Essar Energy acquires Navabharat Power Pvt. Limited, a 2,250 MW coal fuelled power plant being set up in Orissa

february 2011Essar Energy completes convertible bond offering,to raise US$550 million

february 2011Essar Energy enters into exclusivity agreement and US$350 million offer for Stanlow refinery, the second largest refinery in the UK


2010 was a year that presented a mix of challenges

and achievements. Despite ongoing uncertainty across the global economy, Essar Energy, with its focus on India, was able to deliver a strong operating and financial performance.

financial resultsOur continuing focus on the stated strategy has resulted in a profit before tax for the year of US$365.5 million and operating cash flow of US$652.7 million. We remain on track to have in place 11,470 MW of power generation capacity by the end of 2014, subject to securing fuel for the projects under development, and to upgrade our refinery to 20 million tonnes per annum capacity with a complexity of 11.8 by September 2012. This is in line with the plans that we announced at the time of our initial public offering.

operationsAcross the portfolio we saw a strong operating performance with good availability from our power plants and another year of record production from our Vadinar refinery.

Despite strong power plant availability, our generation was lower than

planned due to high rainfall during the monsoon season and high gas prices. However, the financial impact of this lower generation is largely mitigated by the structure of our power purchase agreements where payments are primarily based on availability. In October, the first unit of our 380 MW, Vadinar P1 gas fired power plant synchronised with the grid, the first to do so since our Listing in May 2010.

The Vadinar refinery continues to perform well and set records for production and throughput in each quarter of the year. Total throughput for the year was 14.7 million tonnes of crude, well above the refinery’s name plate capacity of 10.5 million tonnes per annum. In total, we processed 20 different crudes during the year including Mangala, our first domestic crude, being delivered through a 590km heated pipeline from Rajasthan, which is in the north of India.

June saw the de-regulation of gasoline prices in India which enabled us to compete on a level playing field with the public sector retailers. The result was an increase in the sales and profitability of gasoline from our near 1,400 retail fuel outlets across India. Despite this, increasing oil prices have pushed up the price of gasoil, delaying the government’s plans to de-regulate gasoil which accounts for around 80% of our retail sales. We continue to plan for 1,700 retail fuel outlets across India by April 2011, but are likely to slow down our plans beyond this time until the path to the de-regulation of gasoil becomes clear.

Growth projectsWe continue to execute well against our significant pipeline of growth projects. In total we invested US$2,957.9 million across our power and oil and gas projects during the year.

In Power, we are currently investing in ten power projects and one transmission project with a combined capital cost of US$2,856.2 million. Six of these projects were under construction at the time of the IPO, but proceeds from the Listing have facilitated the movement of four projects with a combined capacity

chief executive’s report

“We continue to execute well against our significant pipeline of growth projects.”

Delivering strong results


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of 3,570 MW from the development to the construction phase.

2011 is a critical year for our power business as 2,910 MW of new capacity is planned to enter commercial operations during the year. This new capacity will significantly increase the cash flow and profitability of the business and remove the construction risk from these projects. One downside risk continues to be the delay in receipt of forest approvals for coal mines which is holding up our captive mine development.

In our Exploration and Production business, we are extremely pleased with progress at our Raniganj Coal Bed Methane project. At the end of the year we had drilled 49 production wells with 19 producing gas. As each new well is drilled, our knowledge of the field improves and we are confident of reaching our peak production of 3.5 mmscm/day by 2014. However progress on the production sharing contract for our Ratna/R Series field has been slower than expected.

In Refining, the phase 1 of our Vadinar expansion is progressing well and is more than 84% complete as of end February 2011. We expect the expansion to reach mechanical completion by the middle of 2011 and enter commercial production during the second half of 2011. The importance of this expansion is the increase in complexity from 6.1 to 11.8. This will allow us to process a higher proportion of heavy and ultra-heavy crudes and produce more high value products. We expect this to result in an increase in the profitability of the refinery.

During the year we also identified an opportunity to further increase the capacity of the refinery to 20 mmtpa at a very competitive capital cost. This optimisation project has already commenced and is on track to complete by September 2012. Post our expansion, Essar Energy will be in a situation where it will need to export a higher proportion of high value products in the short to medium term, particularly gasoline and gasoil. The natural markets for these products are Europe and the US and, in line with

this, we announced in February an offer to purchase the Stanlow refinery in the UK for US$350 million. The European refining industry is facing a number of challenges as existing facilities age and need to be upgraded to meet new fuel specifications. Given Stanlow’s scale and high complexity, we believe that Stanlow will be a survivor in this market and under the right ownership it will thrive and prosper. We believe that Stanlow will be a valuable addition to the Essar Energy portfolio and that this acquisition is fully aligned with our stated strategy.

Health and safetyA true measure of success is enabling our employees to operate in a healthy and safe working environment. I am pleased with the way that our employees have embraced our values in this area and our performance has been recognised externally with the award for the Vadinar refinery of the Gujarat Safety Council’s winner’s shield for the lowest disability injury index in 2009. Also, the Vadinar refinery and the Bhander Power plant at Hazira have received Integrated Management systems certifications from the British Standards Institution after earning both ISO9001/14001 and OHSAS 18001 certification.

Unfortunately, the performance at our under construction projects has been below expectations and is an area of particular focus for improvement. The health and safety of our employees and the communities where we operate is a priority for our Company and is important to me personally as well as the whole senior management team.

Looking forward, our Company has a clear strategy for creating value, using prudent decision making and focused on the Indian energy growth story. At Essar Energy, we have had a good first year and I hope to build on our achievements to deliver our full potential.

naresh nayyarChief Executive

18 March 2011

Delivering strong results Key milestones

april 2010Essar Energy acquires Aries coal mines in Indonesia, comprising 64 mmt of mineable reserves

June 2010Essar Energy receives first Mangala crude to Vadinar refinery, through a dedicated heated and insulated pipeline from the oil fields in Rajasthan

october 2010Unit #1 of Vadinar P1 power station synchronises with the grid, the first to do so since the IPO of Essar Energy in May 2010

november 2010Essar Energy announces optimisation project to take Vadinar refinery capacity to 20 mmtpa, to be completed by September 2012

november 2010Four power projects with a combined capacity of 3,570 MW moved to construction phase, taking power capacity under construction to 8,070 MW


Revenue US$million

$321.8m 21%

321.8 265.1

1009

EBITDA US$million

$213.5m 37%

213.5 156.2

1009

Capex US$million

$1,644.0m 363%

1,644.0 355.3

1009

essar energy at a glance

2010 saw the creation of Essar Energy as the holding company for the Essar Group’s power and oil and gas interests.

Essar Energy was listed on the main market of the London Stock Exchange through an initial public offering which raised US$1.9 billion gross proceeds (US$1.8 billion net proceeds) and at that time was the largest primary offering in the London market since 2007.

Subsequent to the Listing, Essar Energy entered the FTSE 100 on 21 June 2010. Essar Energy also entered the MSCI UK index on 30 November 2010 and on 1 December 2010, Futures and options contracts were made available for trading on LIFFE CONNECT® and within Bclear. These events have created additional interest in the shares of Essar Energy and we have seen an increase in the liquidity of the Company’s shares since Listing.

The Company’s strategy is clear; to create a world-class, low cost Indian energy company, positioned to capitalise on India’s rapidly growing energy demand. While the focus is on India, Essar Energy will also pursue opportunities overseas which support our strategy and deliver value to its shareholders.

power Generation and transmission

Essar Energy has four operational power plants in India and one in Algoma, Canada, with a total installed capacity of 1,600 MW. With ten power projects and one transmission project in construction totalling 8,070 MW, Essar Energy is well on track to achieve its target of total installed capacity of 11,470 MW by the end of 2014, subject to securing the fuel for the projects under development.


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Revenue US$million

$9,680.6m 43%

9,680.6 6,758.7

1009

Number of blocks number

17 42%

17 12

1009

EBITDA US$million

$514.7m 0%

514.7 515.5

1009

CBM reserves mmboe

2,132mmboe 340%

2,132 485

1009

Capex US$million

$852.5m 696%

852.5 107.1

1009

Capex US$million

$58.5m 194%

58.5 19.9

1009

oil and Gasexploration and production

oil and Gasrefining and marketing

Essar Energy has a diverse portfolio of 17 blocks and fields for the exploration and production of oil and gas in India, Australia, Indonesia, Madagascar, Nigeria and Vietnam. The Raniganj Block has drilled 49 production wells and the Company is confident of reaching its peak production of 3.5 mmscm/day by 2014.

The Vadinar refinery had a throughput capacity of 14.7 mmtpa in 2010. It is due to expand to 18 mmtpa by mid 2011 increasing the complexity from the current 6.1 to 11.8. The refinery will be further optimised to 20 mmtpa by September 2012 at a very competitive capital cost. The Company also has 1,385 retail fuel outlets across India operating under the Essar brand.


board of Directors

mr ravi ruia, 61chairmanMr Ravi Ruia, a non-resident Indian, is the Chairman of Essar Energy and Vice Chairman of Essar Group. Mr Ruia belongs to the generation of industrialists who have played a significant role in leading India’s industrial renaissance. An engineer by training, his entrepreneurial abilities have enabled the Essar Group to become one of the leading names in the global industry.

Mr Ruia began his career in the family business and has worked with his elder brother, Shashi Ruia, towards steering the Essar Group to its current position of eminence, helping in the consolidation of its businesses through backward and forward integration, and through setting up overseas ventures.

Mr Ruia has overseen Essar Group’s globalisation plans, including new ventures in Africa, South East Asia and the Middle East. He has led the recent acquisitions of Algoma Steel (now called Essar Steel Algoma) in Canada, and Minnesota Steel (now called Essar Steel Minnesota) and Trinity Coal in the USA.

Mr Ruia is a recipient of the Business India Businessman of the Year Award 2010.

mr prashant ruia, 41vice chairmanMr Prashant Ruia, a non-resident Indian, is Vice Chairman of Essar Energy and Chief Executive of Essar Group. Born in 1969, Mr Ruia has been involved with the Essar Group’s operations and management since 1985. He is fundamental to Essar Group’s strategy, and is actively involved in the its growth and diversification both within India and internationally.

The Essar Group is today a multinational conglomerate and a leading player in the sectors of Steel, Oil & Gas, Power, Communications, Shipping, Ports & Logistics, Constructions and Minerals. With operations in more than 20 countries across five continents, the Essar Group employs over 70,000 people.

Mr Ruia is known for his project management skills, financial expertise and people management capabilities.

Mr Ruia holds several key positions on various regulatory and professional boards, and was recently appointed to the audit committee of the World Steel Association. He was also a member of the Prime Minister of India’s advisory council on trade and industry in 2007. Mr Ruia is a member of the Energy Boardroom at the World Economic Forum.

mr naresh nayyar, 58chief executive Mr Nayyar is the Chief Executive of Essar Energy as well as the Managing Director and Chief Executive of Essar Oil. Mr Nayyar joined Essar Oil in October 2007. Prior to joining Essar Oil, Mr Nayyar was the CEO of ONGC Mittal Energy Limited (a joint venture between Oil & Natural Gas Corporation Limited and Mittal Investments) from November 2005 to September 2007.

Previously, Mr Nayyar was Director of planning and business development at Indian Oil Corporation Limited from October 2002 to November 2005, where he had worked since 1975. Mr Nayyar was also Chairman of Lanka IOC Limited from October 2002 to November 2005 and a member of the boards of Oil & Natural Gas Corporation Limited, Petronet LNG and IBP. He was also the Chairman of the Indian Oil Marubeni Panipat Power Project from March 2003 to November 2005.


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mr philip aiken, 62independent non-executive DirectorMr Aiken is an independent Non-Executive Director on the Board of the Company. He is currently Chairman of Robert Walters plc, Senior Independent Director of Kazakhmys plc and a Non-Executive Director of National Grid plc and Miclyn Express Offshore. He has over 35 years experience in industry and commerce having previously from 1997 to 2006, been Group President Energy and President Petroleum of BHP Billiton.

Prior to that he held senior positions with BTR (1995–1997) and the BOC Group (1970–1995), both in the UK and Australia. He has also been a Senior Advisor for Macquarie Capital (Europe), was Chairman of the 2004 Sydney World Energy Congress and served on the boards of Governor of Guangdong International Consultative Council, World Energy Council and Monash Mt Eliza Business School.

mr sattar Hajee abdoula, 51independent non-executive DirectorMr Hajee Abdoula is an independent Non-Executive Director on the Board of the Company. He has been the transaction services partner of Grant Thornton in Mauritius since its launch in 1999. Mr Hajee Abdoula is also the lead partner for litigation support. He has over 30 years experience in accounting, audit and consultancy.

Since 1999 he has been specialising in transaction services and advising clients in various sectors including, banking, financial services, insolvency and global business. Mr Hajee Abdoula is actively involved in providing support to Grant Thornton offices in African countries.

He sits as an independent member on the board of two non-bank financial institutions in Mauritius and is also the Chairman of the Audit Committee. Mr Hajee Abdoula has significant experience in global business (offshore) where he has been advising on structures and tax issues. Mr Hajee Abdoula is a lead advisor to the Government of Ghana in setting up the Ghana International Financial Services Centre.

Mr Hajee Abdoula qualified as a Chartered Accountant (ICAEW) in 1985 and became a fellow of the Institute in 1995.


mr simon murray, 70senior independent non-executive DirectorMr Murray is the Senior Independent Non-Executive Director on the Board of the Company. Currently, Mr Murray is also a Director of a number of public companies: Cheung Kong Holdings Ltd.; Orient Overseas (International) Ltd.; USI Holdings Ltd.; and Richemont SA. Previously, between 1975 and 1993, Mr Murray served on the boards of a number of Hong Kong public companies including South China Morning Post; Cross Harbour Tunnel Company; Hong Kong Aircraft & Engineering Corporation; and Hong Kong Electric. He was also Chairman of the Sheraton and Hilton Hotels between 1985 and 1993.

In 1984 Mr Murray became the Group Managing Director of Hutchison Whampoa, where he stayed for the next 10 years. He was instrumental in the launching of AsiaSat, China’s first international launching of a satellite, on the Board of which he served as Chairman between 1989 and 1993. After 10 years at Hutchison, Mr Murray became the Executive Chairman of Asia/Pacific, Deutsche Bank Group.

Mr Murray was also a member of the advisory board of China National Offshore Oil Corporation and is on the advisory council of Imperial College London. Mr Murray has served as a member of the International Advisory Board of General Electric Co. (USA); Bain (the consultancy company); and N.M. Rothschild. He is currently the Chairman of GEMS, a private equity investment company which he founded in 1998.

mr subhash lallah s.c., 65independent non-executive DirectorMr Lallah is an independent Non-Executive Director on the Board of the Company. He has represented domestic and international companies in arbitration and has a legal career that spans 40 years. Mr Lallah sits as independent Director on the boards of many international funds. His independent directorships include Mauritian Eagle Insurance Company Ltd, Mauritian Eagle Leasing Co Ltd and Deutsche Bank Offshore Mauritius Ltd.

He is a former member of the Board of Governors of the Mauritius Broadcasting Corporation and he has acted as Chairman of the National Transport Corporation and appeared as Chairman and counsel in a number of enquiries. Mr Lallah was a member of parliament of the Republic of Mauritius between 1982 and 1995 and was also a deputy chief whip and deputy speaker of the national assembly.

Mr Lallah read law and political science and was called to the UK Bar in 1970 and the Mauritius Bar in 1971.

board of Directors continued


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mr p sampathchief financial officerMr P Sampath was appointed the Chief Financial Officer of Essar Energy in September 2010. He joined the Essar Group in August 2008 and was previously the Chief Financial Officer of Essar Oil Limited. He has over 30 years of experience in various fields including global corporate finance and treasury, mergers and acquisitions, corporate business planning, investor relations, global HR strategy and financial and management accounting.

Prior to this, Mr Sampath held a number of senior finance roles including Group Chief Financial Officer for RPG Enterprises Limited and Managing Director of GHCL Limited.

Mr Sampath has a first class Bachelor of Commerce degree from Madras University, is a Fellow Member of both the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India

mr Kvb reddyexecutive Director – essar powerMr Reddy is the Executive Director of Essar Power. He is responsible for formulating and directing the overall business strategy of the Power business group and project execution and has been with the Essar Group since 1995.

Mr Reddy has more than 25 years of experience in the power industry and has previously worked for the National Thermal Power Corporation where he gained in-depth experience in the areas of project planning, materials, commercial and erection and commissioning. During this time, he set up three gas-based combined cycle power projects at Anta, Auraiya and Kawas.

Mr Reddy is a graduate in mechanical engineering from NIT Bhopal.

mr mark lidiardDirector of investor relations and communicationsMr Lidiard is the Director of Investor Relations and Communications for Essar Energy and joined the Company in April 2010. Mr Lidiard was previously the Group Communications Director at Lloyds TSB from 2008 to 2009, Vice President of Investor Relations and Communications at BHP Billiton from 2002 to 2007, and Head of Investor Relations at Powergen Plc from 2000 to 2002.

From 1997 to 2000, Mr Lidiard was the Assistant Group Treasurer and Head of Project Finance at Powergen which included responsibility for power project financings in India.

He has a post graduate certificate in business management from Thames Valley University and a degree in Physics with Geology from Southampton University.

senior management team

in addition to the vice chairman and chief executive, the senior management team consists of:


our strategic position

Growth projects ̧During the year we completed the construction of one major project.business segment project location capacity Date completed

power Vadinar P1 Gujarat 380 MW gas fired Unit #1 sync Q4 2010Unit #2 sync Q1 2011

Unit #1 of the 380 MW Vadinar P1 power plant was synchronised with the grid in October 2010 against a target completion date of Q3 2010. The project was completed within its original budget of Rs. 7.25 billion (c. US$160 million).

There are 14 growth projects under construction.

Projects under construction:business segment project location capacity target date for completion

power Mahan Transmission

Madhya Pradesh

415 km length Q1 20121

Salaya I Gujarat 1,200 MW imported coal Q3 2011Mahan I Madhya

Pradesh1,200 MW domestic coal Q4 2011

Vadinar P2 Gujarat 510 MW imported coal Q4 2011Paradip Orissa 120 MW domestic/

imported coal Q2 2012

Hazira II Gujarat 270 MW captive fuel Q4 2012Tori I Jharkhand 1,200 MW domestic coal Q4 2012

exploration and production

Raniganj West Bengal 3.5 mmscm/d2 CBM Q2 2011

refining and marketing

Vadinar refinery Phase 1

Gujarat 4 mmtpa, to reach a capacity of 18 mmtpa at a complexity of 11.8

Q2 20113

1 Line-In Line-Out line will be completed by Q1 2011 to ensure power evacuation from Mahan.2 Peak production based on 2C and best estimate prospective resources, which will be realised in stages over the next 2–3 years.3 Mechanical completion by Q2/Q3 2011 and commercial operations to commence Q3/Q4 2011.

Projects moved to construction during the year:business segment project location capacity target date for completion

power Tori II Jharkhand 600 MW domestic coal Q4 2013Salaya III Gujarat 600 MW pet coke/

imported coalQ4 2013

Salaya II Gujarat 1,320 MW imported coal Q1 2014Navabharat I Orissa 1,050 MW domestic coal Q1 2014

refining and marketing

Vadinar refinery optimisation

Gujarat 2 mmtpa, to reach a capacity of 20 mmtpa at a complexity of 11.8

Q3 2012


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A significant growth

opportunity

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exploration and production n21 Mehsana O22 Ratna D23 Raniganj D24 Assam E25 Rajmahal E26 Sohagpur E27 Talcher E28 IB Valley E

refining and marketing n29 Vadinar 14 mmtpa O30 Vadinar expansion 18 mmtpa C31 Vadinar optimisation 20 mmtpa C32 Vadinar phase II 38 mmtpa D

1385 retail outlets across India O

O OperatingD DevelopmentC ConstructionE Exploration

power n1 Hazira 515 MW O2 Bhander 500 MW O3 Vadinar 120 MW O4 Vadinar P1 380 MW O5 Salaya I 1200 MW C6 Mahan I 1200 MW C7 Vadinar P2 510 MW C8 Paradip 120 MW C9 Hazira II 270 MW C10 Tori I 1200 MW C11 Tori II 600 MW C12 Salaya II 1320 MW C13 Salaya III 600 MW C14 Navabharat I 1050 MW C15 Mahan II 600 MW D16 Navabharat II 1200 MW D

coal mines n17 Mahan Coal Block 125 MT D18 Chakla Coal Block 71 MT D19 Ashok Karkata Coal

Block 100 MTD

20 Rampia Coal Block 112 MT D

international assets: Algoma Power Plant, Canada Aries Coal Mine, Indonesia Mozambique Coal Mine Mombassa refinery, Kenya Madagascar (E+P) Nigeria (E+P) Australia (E+P) Vietnam (E+P) Indonesia (E+P)


powerGeneration and transmission

Essar Energy plc Annual report + accounts 2010 15c

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Essar Energy, a first mover among the private sector players in the Indian power industry, currently has an installed generation capacity of 1,600 MW.

Essar Energy is one of India’s largest private power producers with a 13-year operating track record. The Company’s power business currently has four operational power plants in India and one in Algoma, Canada. Unit #1 of the Vadinar P1 power station was synchronised with the grid in October 2010, the first to do so since our IPO in May 2010.

Essar Energy recently moved four power projects into the construction phase, taking the total installed capacity under construction to 8,070 MW. In addition, the Company has two power projects with an installed capacity of 1,800 MW under development and is well on track to increase the Company’s total installed capacity to 11,470 MW by the end of 2014, subject to securing fuel for the projects under development.

1,600mwOf total installed capacity with five operational power plants

11,470mwOf total installed and planned capacity to be reached by end of 2014

Vadinar P1Synchronised with the grid in October 2010, the first to do so since our IPO in May 2010

One of India’s

leading private power producers


oil and Gasexploration and production


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The first to realise

potentialEssar Energy has a diverse portfolio of 17 blocks and fields for the exploration and production of oil and gas in India, Australia, Indonesia, Madagascar, Nigeria and Vietnam.

Essar Energy owns net 2P reserves of 2 mmboe and 2C contingent resource of 148 mmboe, best estimate prospective resources of 1,012 mmboe and an unrisked in-place resource base of 971 mmboe.

Essar Energy’s development and production assets include the Raniganj Block in West Bengal, Ratna/ R-Series Fields near Mumbai and the Mehsana Block in Gujarat. The Raniganj Block, has certified recoverable resource 993 bcf and is the first Coal Bed Methane block under development.

1,012mmboeOf best estimate prospective resources

17blocksAcross India, Australia, Indonesia, Madagascar, Nigeria and Vietnam

10tcfOf reserves and resources, making it the Company with the largest CBM acreage in India


oil and Gasrefining and marketing


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Leveraging economies of

scaleEssar Energy’s refining business primarily consists of the Vadinar refinery, the second largest private sector refinery in India, a 50% interest in the Kenya Petroleum Refinery Limited and 1,385 retail fuel outlets across India.

The Vadinar refinery in Gujarat processed a record 14.7 mmtpa of crude oil in 2010. Construction is now under way to extend the refinery’s throughput capacity to 20 mmtpa by September 2012. This expansion will increase the complexity from the current 6.1 to 11.8, allowing the refinery to process a higher proportion of heavy and ultra-heavy crudes and produce a higher proportion of middle and light distillates.

Subject to market conditions, the refinery has the potential to be further expanded to 38 mmtpa. Post this expansion, the refinery will have a complexity of 12.8 and will be able to refine all varieties of crude and produce Euro V grade fuels, making it one of the largest single-location refineries in the world.

Essar Energy also holds a 50% interest in Kenya Petroleum Refineries Ltd, Mombassa, a tolling refinery with a current throughput of 1.6 mmtpa.

Essar Energy serves retail customers in India through a modern, countrywide network of 1,385 retail fuel outlets with plans to increase the number to 1,700 outlets across India by April 2011.

20mmtpaOf throughput capacity by September 2012

1,385outletsTo increase to 1,700 outlets across India by April 2011

84%Of Phase 1 refinery expansion complete as of end February 2011 and scheduled to reach mechanical completion by mid 2011


market overview


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Meeting India’s energy

demandstrong india GDp growth outlook

GDP growth is on track to be 8.6% ̧for the fiscal year 2010–11Planning Commission of India targets ̧9% annual growth (2007–2012)Government spending increasing at ̧CAGR 22% between 2007–2012

significant indian power deficit set to continue

Peak power deficit expected to be 12.6% ̧in 2009–10 (source: CEA)

Per capita power consumption far below other ̧BRIC markets: 736 kWh in 2008 vs 2,598 kWh in China, 2,631 kWh in Brazil and 7,194 kWh in Russia (source: IEA Energy Statistics 2010)

44% of Indian households do not currently ̧have access to electricity (source: World Bank)

increasing indian oil and gas consumptionLow per capita oil consumption compared to ̧other BRIC markets: 1.0 barrel per person in 2009 vs 2.4 in China (source: BP Statistical Review 2010)

Low per capita gas consumption compared to ̧other BRIC markets: 1.6 cubic feet per person in 2009 vs 2.3 in China (source: BP Statistical Review 2010)

India, imported nearly 2.1 million bbl/d, or ̧about 70%, of its oil needs in 2009, becoming the sixth largest net importer of oil in the world (source: US Energy Information Administration)

8.6%GDP growth on track for 2010–11

12.6%Of expected peak power deficit in 2009–10

70%Of Indian oil and gas needs were imported in 2009


market overview continued

economic outlookIndia has seen a swift and solid economic recovery over the last year, contrasting positively with many developed economies. GDP growth is on track to be 8.6% for the fiscal year 2010-11, one of the highest rates among the world’s major economies. With nominal GDP forecast at US$1.73 trillion, India will make the transition from a low income country to a middle income country as per capita income crosses US$1,200. High inflation, double-digit for food, remains a concern as it erodes real income. This risk to growth remains a priority for the Indian Government as can be seen from the RBI’s continued monetary tightening through increases in interest rates.

High rates of growth however, are improving the fiscal position of the economy and it is anticipated that the fiscal deficit will be better than the target of 5.5% for this year. This will give the Indian Government more scope to spend, with an expected focus on welfare and infrastructure. In the most recent budget, infrastructure spending was increased by 23% in 2011-12 to US$48 billion. This should offset any dampening of investment from higher interest rates.

Increasing economic growth is positively impacting India’s energy

demand growth. Energy usage is both broadening in the economy and deepening as income levels rise. This will result in increased levels of energy intensity.

It is estimated that India’s total primary energy consumption will grow by 39% in the 10 year period from 1995 to 2015 and increase a further 55% by 2035 (International Energy Outlook, 2010 – US Energy Information Authority). This increasing trend of energy consumption supports our strategy to focus on the energy demand growth in India.

business outlookThe second half of 2010 saw heavy rains during the monsoon season in India reducing peak power requirements in the country. November 2010 saw a reduction in demand and merchant power prices fell as State Electricity Boards reduced their power requirements to avoid paying high prices in the merchant market. January 2011 saw a sharp rebound in merchant prices due to an increase in demand as a result of state elections and an increase in the penalties payable by the State Electricity Boards for reducing system frequency.

Despite this short term volatility, the fundamental drivers of power demand remain robust; increased economic

activity across both the retail and industrial sectors. The supply of new capacity has been unable to keep up with demand, meaning that India continues to experience large and consistent power deficits which are set to continue for the foreseeable future. This lack of reliable power supply, particularly to industry, will have a negative impact on growth.

High raw material and energy costs, particularly gas and coal, will continue to put upward pressure on long term power prices. This is of particular concern given India’s reliance on imported coal and gas for power. The use of domestic resources has the potential to reduce these risks, but progress on the development of domestic resources remains slow.

The Government of India has put in place a regulatory environment to encourage private sector participation in the power generation sector, but still the process of receiving regulatory approvals and delays to the access of fuel supplies means that progress is slower than expected. The current five year plan has forecast growth in generation capacity of 150 GW over the plan period, but this target looks challenging.


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Petroleum product demand in India continues to demonstrate strong growth supported by growth in the Indian economy, increases in per capita income, growth in vehicle ownership and the focus on infrastructure spending. India will remain the anchor market for Essar Energy’s expanded refinery capacity albeit that export sales in the medium term are likely to increase to around 40% of sales due to new capacity additions by the public sector refiners. The planned acquisition of the Stanlow refinery in the UK will increase the sales options available for the export of high value products produced from Vadinar.

Deregulation of gasoline prices in India in June 2010 increased the competitiveness of our retail fuel outlets. However, increasing oil prices with a resultant impact on gasoil prices has adversely impacted the Government of India’s roadmap toward gasoil deregulation.

A rebound in global demand in 2010 had a clear impact on oil prices. Current events in the Middle East and North Africa have the potential to impact oil supplies putting further pressure on prices. This is of particular concern for India which imports around 80-85% of its crude oil needs. This situation is expected to continue despite significant discoveries of both oil and gas in India in recent years. The Company has 11 of its 17 oil and gas and CBM blocks located in India and given the domestic demand scenario, commercialisation of these assets represents a significant opportunity for Essar Energy.

Increasing economic growth


our strategy and performance

stated strategy performance

Optimise performance of all existing assets

Essar Energy intends to capitalise on the existing assets by drawing on the Essar Group’s significant experience and expertise to carry out a number of optimisation projects that will consolidate Essar Energy’s position as one of India’s largest energy groups. This will be achieved through a combination of debottlenecking operating plants, further improving efficiency, expanding output and increasing economies of scale.

2010 has seen a record operating performance from the power plants as well as the Vadinar refinery. Operationally, all plants have performed well with availability between 94% and 99% and 2010 has seen an 8.5% increase in overall generation over 2009. The Vadinar refinery witnessed a record throughput of 14.7 mmtpa in 2010 and a 57% increase in CP GRM in 2010.

Deliver growth through a variety of power and oil and gas projects

Essar Energy plans to pursue further growth through both green-field and brown-field energy projects in the areas of exploration and production, refining, marketing, power generation, raw material acquisition, transmission and distribution.

Unit #1 of the Vadinar P1 380 MW gas fired power station synchronised with the grid in October 2010, the first one to do so since our IPO. Essar Energy also moved four of its power projects into the construction phase taking the capacity under construction to 8,070 MW. The Refinery Phase 1 expansion is now more than 84% complete as of end February 2011 and the expansion of the refining capacity to 20 mmtpa is expected by September 2012, at a very competitive capital cost.

Leverage skills and Indian asset base to identify growth opportunities

Essar Energy intends to leverage its established skills and Indian asset base in oil and gas, and power, to seek organic and inorganic growth opportunities in India and overseas, with the objective of improving market leadership, economies of scale, synergies and maximising shareholder value.

Essar Energy acquired coal mines in Indonesia and Mozambique in 2010 comprising 100 mmt of mineable reserves. These mines are currently progressing through the approval process and will supply coal to the upcoming power plants of Essar Energy. In June 2010, Essar Energy was declared the winner of four CBM exploration blocks, which will give Essar Energy additional in place prospective resources of over 7.6 tcf of CBM gas. In July 2010, Essar Energy announced the acquisition of Navabharat Power Pvt. Limited, a company setting up a 2,250 MW coal fired power station in Orissa, India, including allocation of the Rampia coal block of 112 mmt. In November 2010, Essar Energy announced a project to further enhance the capacity of the Vadinar refinery by 2 mmtpa to take the total capacity to 20 mmtpa by September 2012.

Be a good corporate citizen

Essar Energy will continue to act as a good corporate citizen with respect to the health and safety of its employees and the communities in which it operates. The maintenance of high environmental performance standards are significant responsibilities within the conduct of Essar Energy’s operations and the aim of the Company is to be recognised as a leader in health, safety and environmental management.

Essar Energy’s strong focus on health, safety and environment has been instrumental in the Vadinar refinery completing 1,000 days of refinery operations without any lost-time incident, thus achieving over 18 million man hours without a lost time incident as of 31 December 2010. The Refinery also received the Gujarat Safety’s winner shield for the Lowest Disability Injury Index in 2009, thus reinforcing Essar Energy’s focus on health and safety. The Vadinar refinery and the Bhander Power plant at Hazira have received Integrated Management Systems (‘IMS’) certification from the British Standards Institution after earning both ISO9001/14001 and OHSAS 18001 certification.


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stated strategy performance

Optimise performance of all existing assets

Essar Energy intends to capitalise on the existing assets by drawing on the Essar Group’s significant experience and expertise to carry out a number of optimisation projects that will consolidate Essar Energy’s position as one of India’s largest energy groups. This will be achieved through a combination of debottlenecking operating plants, further improving efficiency, expanding output and increasing economies of scale.

2010 has seen a record operating performance from the power plants as well as the Vadinar refinery. Operationally, all plants have performed well with availability between 94% and 99% and 2010 has seen an 8.5% increase in overall generation over 2009. The Vadinar refinery witnessed a record throughput of 14.7 mmtpa in 2010 and a 57% increase in CP GRM in 2010.

Deliver growth through a variety of power and oil and gas projects

Essar Energy plans to pursue further growth through both green-field and brown-field energy projects in the areas of exploration and production, refining, marketing, power generation, raw material acquisition, transmission and distribution.

Unit #1 of the Vadinar P1 380 MW gas fired power station synchronised with the grid in October 2010, the first one to do so since our IPO. Essar Energy also moved four of its power projects into the construction phase taking the capacity under construction to 8,070 MW. The Refinery Phase 1 expansion is now more than 84% complete as of end February 2011 and the expansion of the refining capacity to 20 mmtpa is expected by September 2012, at a very competitive capital cost.

Leverage skills and Indian asset base to identify growth opportunities

Essar Energy intends to leverage its established skills and Indian asset base in oil and gas, and power, to seek organic and inorganic growth opportunities in India and overseas, with the objective of improving market leadership, economies of scale, synergies and maximising shareholder value.

Essar Energy acquired coal mines in Indonesia and Mozambique in 2010 comprising 100 mmt of mineable reserves. These mines are currently progressing through the approval process and will supply coal to the upcoming power plants of Essar Energy. In June 2010, Essar Energy was declared the winner of four CBM exploration blocks, which will give Essar Energy additional in place prospective resources of over 7.6 tcf of CBM gas. In July 2010, Essar Energy announced the acquisition of Navabharat Power Pvt. Limited, a company setting up a 2,250 MW coal fired power station in Orissa, India, including allocation of the Rampia coal block of 112 mmt. In November 2010, Essar Energy announced a project to further enhance the capacity of the Vadinar refinery by 2 mmtpa to take the total capacity to 20 mmtpa by September 2012.

Be a good corporate citizen

Essar Energy will continue to act as a good corporate citizen with respect to the health and safety of its employees and the communities in which it operates. The maintenance of high environmental performance standards are significant responsibilities within the conduct of Essar Energy’s operations and the aim of the Company is to be recognised as a leader in health, safety and environmental management.

Essar Energy’s strong focus on health, safety and environment has been instrumental in the Vadinar refinery completing 1,000 days of refinery operations without any lost-time incident, thus achieving over 18 million man hours without a lost time incident as of 31 December 2010. The Refinery also received the Gujarat Safety’s winner shield for the Lowest Disability Injury Index in 2009, thus reinforcing Essar Energy’s focus on health and safety. The Vadinar refinery and the Bhander Power plant at Hazira have received Integrated Management Systems (‘IMS’) certification from the British Standards Institution after earning both ISO9001/14001 and OHSAS 18001 certification.


operating reviewpower Generation and Transmission

O perationally, all plants performed well with availability between

94% and 99%. Overall generation was 8.5% higher than 2009, but lower than planned due to heavy rains during the monsoon season in India, which affected domestic and agricultural power demand, as well as the impact of higher gas prices.

In October 2010, the first unit of the 380 MW Vadinar P1 gas fired power station was synchronised with the grid. The second unit’s synchronisation was delayed to January 2011 due to a faulty starter motor that had to be sent back to the manufacturers for repair. Dispatch from this plant is expected to remain low until the Vadinar phase 1 refinery expansion is complete, when demand for power and steam should increase.

In addition to completing the Vadinar P1 power station, the Company continued to make significant progress with its other power projects and in November 2010 moved four power plants with a combined capacity of 3,570 MW into the construction phase. We now have 8,070 MW of capacity under construction with 2,910 MW due to enter commercial operations during 2011.

Whilst there are some delays to the projects scheduled to come in to operation in 2011, primarily due to heavy rains during the monsoon season in India, subject to securing fuel for the projects under development, we remain

on track to have 11,470 MW of operating power capacity by the end of 2014.

In India, we are still awaiting forest clearance for our Mahan, Chakla and Ashok Karkata coal blocks which will provide fuel for the Mahan I and Tori power stations. This clearance is delaying the development of a number of coal blocks in India and as a result, an Empowered Group of Ministers was formed by the Prime Minister’s Office to resolve all cases where significant progress has been made on construction of the power plant.

Despite a visit to our sites in July 2010 and a favourable recommendation, we have not yet received forest clearance. While we are optimistic of a favourable outcome, we will not be in a position to supply coal from our own mines ahead of the commissioning of the 1,200 MW Mahan I coal fired power project. The first unit of this power plant will commence commissioning in September 2011. We have therefore applied to Coal India Limited for tapering coal linkage until our own mines are operating at full capacity. We expect to receive this clearance shortly.

In July 2010, Essar Power Limited entered into an agreement for the acquisition of a 100% interest in Navabharat Power Pvt. Limited (‘Navabharat Power’) for a consideration of US$50.2 million. Navabharat Power is a 2,250 MW coal-fuelled power plant being set up in Orissa, India and is being implemented in two phases; phase one of 1,050 MW and phase two of 1,200 MW. The total estimated capital cost is US$2 billion. The project includes the allocation of the Rampia coal block of 112 mmt and a 4.7 mmtpa coal linkage with Coal India Limited. Phase I of the project progressed to the construction phase in November 2010.

2011 is a critical year as we expect 2,910 MW of installed capacity to enter commercial operations from our Salaya I, Mahan I and Vadinar P2 power stations. This new capacity

will increase the cash flow and profitability of the business and also take Essar Energy closer to its target of 11,470 MW by the end of 2014.

coalEssar Energy has 450 mmt of coal reserves in coal mines across India as well as Indonesia and Mozambique. In India, Essar Energy has four domestic coal blocks with coal reserves of 350 mmt: the Mahan coal block in Madhya Pradesh, the Chakla and Ashok Karkata coal blocks in Jharkhand and the Rampia coal block in Orissa. Essar Energy also has coal reserves of 64 mmt in Indonesia and 35 mmt in Mozambique.

The acquisition of the Aries coal mine in Indonesia, comprising 64 mmt of mineable reserves, was completed in April 2010. The mine will provide fuel for the Salaya I power station and is currently progressing through its approval process ahead of the commencement of mining. First production is expected in the fourth quarter of 2011. In the interim, the Salaya I power project will have the benefit of its contract with Essar Shipping to source coal at a landed price of US$55/tonne. Commissioning of the first unit of the Salaya I plant is due to commence in May 2011.

During the period Essar Power also purchased a coal resource of approximately 35 mmt in Mozambique from an Essar affiliated company. Total consideration for both mines was US$148 million.

Currently, Essar Energy does not have any operating coal mines as it is awaiting the final forest clearance allowing mining to proceed but is optimistic of a favourable outcome. In the meantime Essar Energy has applied for temporary coal supplies to ensure coal availability for the plants and is hopeful of receiving these in time.

High power availability


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case study

limited domestic supply of power generation equipment is a key reason for delays in indian power projects.

Essar Energy has addressed this problem by modularising the design, engineering and construction of its power projects using a sister company, Essar Projects, as the engineering, procurement and construction contractor and building strong relationships with major overseas equipment suppliers.

This approach has allowed Essar Energy to reduce design and construction costs, optimise delivery timelines and lower operating and maintenance costs against peers.

Essar Energy recently received an appreciation letter from one of its major equipment suppliers, Harbin Power Equipment Company, the largest manufacturer of power plant equipment in China, for the erection quality of the steel structure of the boiler at the Mahan power plant.


operating reviewoil and Gas Exploration and Production

Largest CBM acreage in India

E ssar Energy has one producing oil field, the CB-ON/3, Mehsana

field in Gujarat. Total production for the year was 9,616 barrels, up from 2,974 barrels in the prior year.

During 2010, the Company was awarded four exploration blocks under the Government of India’s CBM-IV bid round. The four blocks comprise 2,233 sq.km of exploration acreage with in-place prospective resources of over 7.6 tcf of CBM gas, according to documents issued by the Directorate General of Hydrocarbons at the time of bidding. These blocks, together with existing CBM block at Raniganj, West Bengal, make Essar Energy the Company with the largest CBM acreage in India and over 10 tcf of reserves and resources. The Company has signed the CBM contracts for these blocks and is in the process of obtaining appropriate licences, including the Petroleum Exploration Licences. The Company is also planning the initial work programme for these blocks.

Raniganj in West Bengal, our first CBM block under development, has made significant progress during the year. Currently 19 wells are producing about 30,000 scm/d of gas and an additional 30 production wells have been drilled. To accelerate our work programme we have ten drilling rigs of various capacities operating at site and one hydrofracturing unit. To date, 201 bcf of gas has been classified in the 2C, contingent resource category with another 792 bcf classified as a best estimate prospective resource. 14 wells are currently being drilled with a view to migrate more resources to

the 2C, contingent resource category during the second half of 2011.

In December 2010, the Company signed an agreement to farm out a 37% participating interest in the OPL 226 oil and gas block offshore Nigeria to Agamore Energy Limited, a local Nigerian Company. This block was awarded to Essar in the 2007 Nigerian bid round and a Production Sharing Contract was subsequently signed in March 2010.


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case study

Drilling wells at a low cost while maintaining well integrity is a challenge for cbm developments.

Essar Energy has come up with an innovative solution where two types of rigs are used to drill wells. Conventional water drilling rigs are used initially to depths down to the coal formations and then subsequently the target depth is reached using air drilling rigs.

This practice has various benefits such as reduced formation damage, faster penetration rates and reduced drilling costs.

Further, Essar Energy has deployed an innovative technique for extracting gas from the coal seams by using a coil tubing unit for hydrofracturing. This technology allows for multiple coal seams to be hydrofractured at a time, compared to just one coal seam for conventional hydrofracturing, thereby reducing the time required for well completion.


Operating reviewOil and Gas Refining and Marketing

Record refinery throughput

O perationally, the Vadinar refinery in Gujarat continues to operate

well above its nameplate capacity of 10.5 mmtpa, processing a record 14.7 mmt of crude oil (107.2 mmbbl) during 2010, 11.3% higher than the 13.2 mmt of crude oil (96.3 mmbbl) processed during 2009. This produced a CP GRM1, inclusive of sales tax benefit, of US$6.6 per barrel for the period, which was a 57% improvement compared with a CP GRM in 2009 of US$4.2 per barrel. In June 2010, the refinery received its first Mangala crude through a dedicated heated and insulated pipeline from the oil fields in Rajasthan. This low sulphur, heavy and high pour crude is an important new source of crude for Essar Energy as it improves crude oil supply security and benefits from lower logistics costs and taxes. Exports from the Vadinar refinery increased to 31% in 2010 compared to 23% in 2009. This was primarily due to an increase in export sales of fuel oil caused by increasing displacement of fuel oil in India with gas.

Essar Energy operates, through a franchise model, 1,385 retail fuel outlets

across India selling gasoline and gasoil under the Essar brand with a further 250 under construction. In June 2010, the Government of India announced plans to fully deregulate retail prices of gasoline and to gradually deregulate gasoil prices over time. This decision supported our plans to increase our retail fuel outlets to 1,700 by April 2011, which remains on track. However, an increasing oil price has put pressure on the market price of gasoil, which in turn has caused the uncertainty regarding Government of India’s plans to deregulate retail prices of gasoil. As a result, Essar Energy intends to slow down its plans to increase retail outlets beyond this number until there is further clarity on gasoil deregulation. Additionally, the Company is increasing non-fuel retailing activities in its current portfolio of retail outlets to provide an additional source of revenue.

The phase 1 refinery expansion is scheduled to reach mechanical completion mid 2011. This will be preceded by a 35 day shut down during May/June 2011 to allow for the tie-in of the new units and for routine

maintenance. Ramp up of the new units will commence in Q3 2011, with the majority of the increased production expected from mid Q4 2011. Completion of the phase 1 refinery expansion will increase production to 375,000 barrels per stream day from 300,000 barrels per stream day and more importantly, increase complexity from 6.1 to 11.8. The increased complexity means that the refinery can increase the proportion of heavy and ultra-heavy crude that it processes through the refinery and produce a higher proportion of middle and light distillates. We expect this to result in a positive improvement in GRMs. While the construction costs of the Phase 1 refinery project are within the overall budget including the contingency utilisation relating to change of scope, costs are estimated to increase by approximately US$111.6 million, 6.6% of the original project cost. This increase is mainly due to expected delay in commissioning and related interest costs and pre-operative expenditures.

In November 2010, the Company announced plans to further increase the capacity of the refinery to 20 mmtpa, or 405,000 barrels per stream day. This will be achieved through optimisation of some of the refinery units at an estimated cost of Rs. 17 billion (c. US$379 million); the project will be completed by September 2012. The move follows a detailed project review that identified several opportunities to de-bottleneck the refinery and revamp some of the units at an extremely competitive capital cost.

1 See Appendix 1 for an explanation of CP GRM


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case study

post commissioning of the vadinar refinery, process studies were carried out to enhance the capacities and throughput of a number of refinery units.

The team conducted test runs, simulation studies and hydraulic studies to remove bottlenecks in the operating refinery.

With the addition of four crude blending facilities, the refinery has been able to effectively blend various varieties of crude in small quantities to saturate all sections of the mother units. This has resulted in an increased throughput from the refinery in every quarter since commissioning.

The refinery is currently operating at 14.7 mmtpa, up from 10.5 mmtpa in 2008 while fully complying with international standards of safety and security. This increase in throughput has supported improved profitability for Essar Energy.


corporate responsibility


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A strong track

recordStrong focus on health, education, ̧and infrastructure improvements in the communities near sitesContinuing investment in schools, ̧adult education initiatives and medical facilities2010 was declared as the Year of Safety ̧with the Vadinar refinery achieving more than 1,000 days and over 18 million man hours without a lost time incidentDetermination to develop our ̧people: 2011 declared as the Year of Internal Talent Management


corporate responsibility continued

Targets for 2011

improvement in safety culture, benchmarking our performance and adopting best practice

training– Employee Health and

Safety competency and training

– Increase in the number of training hours per employee

– Compulsory online training and certification for all employees in health, safety and environment

competency assessment of contractors involved in jobs where safety is critical

making safety training a prerequisite for employees being considered for promotion to higher levels

t Essar Energy, we are committed to ensuring our strategy, business

and operations are built around a culture of responsible behaviour by all our employees, which in turn reflects everything we do as we seek to create value for our stakeholders.

This applies to the way in which we deal with colleagues internally just as much as those outside the business with whom we come into contact or on whom our business has an impact.

Building and operating large scale power, oil and gas assets represents a challenge. However, our aim is to ensure that as far as possible the impact on people, on the communities in which we operate and on the environment is positive, and that any risks and consequences from our operations are minimised. Within this, a key imperative is a concern with people’s health and safety.

We are continually seeking to benchmark against best practice, to embrace change and to improve our performance. This report is intended to summarise our approach, policies and performance across the key areas of health and safety, the environment and our communities.

Health and safetyEssar Energy’s business revolves around constructing and operating very large assets carrying oil, refined products, natural gas, high voltage electricity and coal. These are potentially hazardous by their nature and it is therefore critical that we take all steps possible to protect our employees and others in the vicinity of these assets.

Such a focus on health and safety must be built into the culture of our employees from the top downwards, thus ensuring that potential problems can be dealt with proactively before they occur. Indeed, 2010 was declared Year of Safety by the Essar

Group Chairman Shashi Ruia and Safety Champions were nominated across the business to promote the safety message, along with the introduction of various safety awards.

To prevent recurrence of accidents during construction activities, ongoing measures are being taken to identify key areas of risk and ensure that appropriate steps are taken with staff and contractors to minimise accidents and reinforce the need for a safe working environment. The measures undertaken include; carrying out competency assessments for contractors carrying out safety critical jobs, checking contractor equipment for fitness, enhanced supervision of contractors work, carrying out safety training and briefings to contract workers and regular safety meetings and discussions.

Essar Energy’s Lost Time Injury Frequency Rate for operational plants for 2010 has remained flat and is a constant focus area for management.

As at the end of December 2010, our operational sites had achieved the following number of days without a lost time incident:

2010

Vadinar refinery 1,004Essar Power, Hazira 3,128Bhander Power, Hazira 2,463Vadinar Power, Vadinar 1,519

The Vadinar refinery and the Bhander Power plant at Hazira have received Integrated Management Systems (‘IMS’) certification from the British Standards Institution after earning both ISO 90 01/14001 and OHSAS 18001 certification. We aim to achieve OHSAS 18001 certification for all the other Essar Energy assets. The following Essar Energy sites have received the OHSAS 18001 certification:

Essar Energy Holdings Ltd;¸¸

Essar Oil Vadinar refinery; ¸¸

Essar Power Holdings Ltd;Essar Power Hazira Ltd; and¸¸

Bhander Power Ltd.¸¸

environmentEssar Energy is determined to continue its focus on minimising environmental impacts from the construction and operation of its assets. Although this is a major challenge, it is also an opportunity to show how we can make a difference. We have achieved ISO 14001 standard for some of our sites and our Bhander Power plant at Hazira has received

ISO 14001:2004 certification. There is an ongoing focus on ensuring that in future all of our other sites are also certified to ISO 14001:2004.

The following Essar Energy Sites have received the ISO 14001 certification:

Essar Energy Holdings Ltd;¸¸

Essar Oil Ltd., (Vadinar refinery);¸¸

Essar Power Holdings Ltd; and¸¸

Essar Power Hazira Ltd.¸¸

The ISO 14001 certification for Bhander Power Ltd is currently in process.

In 2011, one priority is to step up our response to climate change. As a key player in the energy sector, we know that our approach to tackling global warming will be important to our business competitiveness in the future. We are currently going through a carbon emissions accounting process at our Vadinar refinery, the associated power station and other operations on site – including indirect and fugitive emissions. We will in due course prepare a carbon management action plan. We will also be fully briefing employees on the importance of tackling climate change.

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case study

environmental projects

Examples of the environmental projects delivered include a self sustainable, 700 acre greenbelt area around our oil refinery at Vadinar, containing over 300,000 saplings which apart from improving the visual impact also gives a carbon sink around the refinery complex.

The area housing the refinery complex borders on the Gulf of Kutch coastline and is naturally arid, with low rainfall. It also includes areas designated by the Gujarat State Government as Marine National Park and Marine National Sanctuary, so environmental initiatives are of particular importance here.


s part of our efforts to minimise the impact of our energy production

activities, we have been investing in Clean Development Mechanism projects, two of which have also been registered at the United Nations Framework Convention on Climate Change. These projects are:

155 MW unit at the 495 MW Bhander ¸¸

Power gas-fired power station at Hazira, registered in February 2008. The total number of Certified Emission Reduction units for this project for the year to April 2010 were approximately 70,000; and340 MW unit at the 495 MW ¸¸

Bhander Power gas-fired power station at Hazira, registered in October 2010. The total number of CERs for this project are expected to be around 257,000 per year.

In addition to the above, our refinery at Vadinar has also participated in the Clean Development Mechanism global programme. Various recent technical inputs have led to further opportunities to reduce carbon emissions being identified and these are currently being progressed as projects with the aim of securing registration with the UNFCCC.

Given the large requirement for water as part of our energy production and refining processes, our management of water resources is critical to the environment in which we operate. We have taken considerable steps to reduce water usage and have also started collecting rain water. As a result of this, in 2010, none of the water sources near our plants were significantly affected by the withdrawal of water for industrial use.

communityEssar Energy has a strong focus on the developmental needs and aspirations of communities near

its sites. All of our corporate social responsibility activities and projects, and those of the wider Essar Group, are managed through the Essar Family Foundation. The EFF focuses on education, health, entrepreneurship, infrastructure, women’s empowerment, child welfare, environment and community care. It particularly concentrates on families who have contributed their land and other resources to facilitate development of our plants and employees who live in surrounding areas.

educationAt Vadinar, the Shri. NK Ruia Madhyamik Vidalaya School, which was founded by Essar in 1993 in Lonavala, has seen a huge increase in student enrolment. This school, which started with six students, now has 177.

Essar also contributes towards upgrading and refurbishing other schools in the region around Vadinar, for example providing new classrooms, new toilet blocks and new computers. Particularly able students are given financial support to allow them to pursue further education. Other support includes the organisation of English and Computer Studies classes in some village schools.

Assistance with vocational training for adults and older students has also been provided in some locations. Near Essar’s Mahan power plant site in Madhya Pradesh, a computer training centre has been established, allowing some successful students to find jobs. Others have been provided with training as electricians, plumbers, welders and fitters at the Industrial Training Institute in Pachore. There are also adult literacy classes which are conducted regularly at Vadinar.

HealthA medical centre has been provided by Essar at Nagwa village, near its Mahan site. This centre provides free medicines, medical checkups and ambulance services to villagers.

In 2007, Essar established a Community Health Centre in Jankhar village, near Vadinar. This facility treated 30,873 patients in 2010, with the doctors on call including a paediatrician, a gynaecologist and an ear, nose and throat specialist. There is also an ambulance and paramedics available.

This centre is of particular importance given that the other two nearest health centres or hospitals are 20km and 40km away. An associated mobile clinic treated a further 19,108 patients in 2010, and a mother and child care centre treated 1,425 patients.

infrastructureEssar Energy is actively involved in providing infrastructure improvements in the villages surrounding its facilities. Initiatives include repairing roads, particularly during the rainy season when roads can quickly erode, laying of water supply pipelines and associated sump and pump house facilities in some villages.

peopleEssar Energy views its employees as its biggest asset and is therefore highly focused on developing people right across the business. Essar Energy employs over 2,300 people, primarily in India and these employees come from diverse backgrounds but every effort is made to ensure they are treated fairly and with respect and given equality of opportunity to progress.

One priority has been to upgrade our processes around recruiting talent externally and managing talent internally to ensure we have the required capability as the business grows rapidly. This has involved introducing more robust recruitment processes, with more of the activity conducted in-house. In particular, we have a series of programmes designed to train and develop young professionals entering the organisation. We have also declared 2011 as the year of Internal Talent Management, underlining our commitment to identify and develop the high potential employees we already have. This includes a strong focus on succession planning.

Our people priorities for 2011 include further building Essar Energy’s reputation as an ‘Employer of Choice’ which people aspire to work for. This is being done partly through improving relationships with our people through higher levels of engagement, with an emphasis on elements including quality of life, opportunities and total rewards. We are also improving our management and motivation of people, helped by linkage of reward with business results.

corporate responsibility continued

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case study

community projects

At the Vadinar refinery, we supply approximately 24 million litres of water per year to the surrounding villages, which is brought in by tankers. There were 16,500 tanker loads supplied to 12 villages in 2010, compared with 6,544 the previous year.

We have also developed watersheds, deepened village ponds and diverted two small rivulets to these ponds, resulting in village bore wells being extremely well supplied. We now intend to build a water purification plant to supply these villages with 20,000 litres a day capacity, allowing water with high total dissolved solids levels of between 2000-2800 mg/litre to be purified to the potable level of 150 mg/litre.


The following section provides an overview of our financial performance in the year, highlighting the key financial drivers and performance indicators for the Group.

income statement

year ended 31 December2010

$ million2009

$ millionChange

%

Revenue 10,005.6 7,023.8 42

EBITDA1 718.9 663.7 8

Net finance costs (287.4) (283.8) 1

Profit before tax 365.5 285.7 28

Taxation (117.2) (78.9) 49

Profit after tax 248.3 206.8 20

CP1 GRM (including sales tax benefit) (US$/bbl) 6.6 4.2 57

CP EBITDA1 (including sales tax benefit) 703.6 506.9 39

1 See pages 39 and 40 for definition. Note CP EBITDA presented above is on a Group basis.

segmental revenue and ebitDa

year ended 31 December(US$ million)

Revenue change%

EBITDA change%2010 2009 2010 2009

Power 321.8 265.1 21 213.5 156.2 37

Exploration and Production 3.2 – – 1.1 (8.0) 114

Refining and Marketing 9,680.6 6,758.7 43 514.7 515.5 –

Centre – – – (10.4) – –

total 10,005.6 7,023.8 42 718.9 663.7 8

Note the above table presents results for each segment following inter-segment eliminations.

revenue – GroupEssar Energy revenue increased by US$2,981.8 million over 2010, reflecting a 42% growth year on year, primarily driven by increased refined product prices and record refinery throughput and production. Additionally, a full year of operations at the Algoma power plant, commissioned in June 2009, has helped increase power revenues.

revenue – powerPower revenues improved by US$56.7 million from US$265.1 million in 2009 to US$321.8 million in 2010. This 21% increase was primarily as a result of a full year of operation of our Algoma power plant, Canada. Additional revenues were also generated from sales under an ABT, a frequency based pricing mechanism, as well as increased recovery of fixed charges in Bhander under the related power purchase agreement. The ABT mechanism is an energy policy adopted in India (ABT Order dated January 2000 issued by the Central Electricity Regulatory Commission) based on pricing bulk power across various stakeholders which is designed to bring about more responsibility and accountability in power generation and consumption through a scheme of incentives to regulate generation and usage of power across the grid.

Production and availability from the Company’s main operating power plants compared to prior year was as follows:Generation

MWhAvailability

%Plant Load Factor

%

asset 2010 2009 2010 2009 2010 2009

Hazira I (515 MW) 2,692 2,810 97 97 60 62

Bhander (500 MW) 2,515 2,228 99 99 57 51

Vadinar1 454 440 96 96 75 80

Algoma (85 MW)2 538 235 94 80 82 65

total3 6,199 5,713 97 97 65 65

1 Vadinar results include Phase 1 of the expansion project from 11 November 2010.2 Algoma plant commenced operations from 13 June 2009.3 Percentages shown for availability and plant load factor represent the weighted average of those for all power plants.

Despite strong power plant availability, our generation, whilst overall improved from 2009, was lower than planned due to heavy rains during the monsoon season in India which affected both domestic and agricultural demand. However, the structure of our power purchase agreements means that the impact of this lower generation on earnings is largely mitigated as payments are primarily based on availability, except those in respect of the Hazira power purchase agreement with Gujarat Urja Vikas Nigam Limited which are derived on an off-take basis.

financial review


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revenue – exploration and productionProduction of 9,616 bbls from the CB-ON/3 Mehsana field, Gujarat, contributed US$0.6 million of revenue in the year to 31 December 2010. A further US$2.6 million was earned by providing Exploration and Production related manpower service to other Essar affiliated companies.

revenue – refining and marketingRefining and Marketing revenues increased by US$2,921.9 million, representing a 43% growth, from US$6,758.7 million in 2009 to US$9,680.6 million in 2010, primarily as a result of the following:

increased refinery product sale prices of US$2,057.9 million with average price of US$647/mt during 2010 against US$498/mt ¸¸

in 2009;improved sales quantity of refinery products contributing further revenues of US$733.5 million with 13.8 mmt of petroleum ¸¸

product sold in 2010 representing a 12% increase against 12.3 mmt sold in 2009;rise of average selling price of traded products from US$798/mt in 2009 to US$1,039/mt in 2010 resulting in US$79.9 million ¸¸

increase in revenues;crude oil trading revenue of US$120.5 million over 2010 which were not undertaken in 2009;¸¸

US$72.3 million increase in sales tax benefit mainly due to increase in selling prices and higher quantity of products sold as ¸¸

compared to the prior year; and US$138.1 million reduction in revenues due to a 34% reduction in the quantity of traded products sold. ¸¸

During 2010, the Vadinar refinery processed 14.7 mmt of crude oil against 13.2 mmt in 2009. 2010 recorded the highest yearly throughput, with the crude distillation unit operating at 140% of its nameplate capacity. All other refinery units operated well beyond their name plate capacity. Furthermore, fuel and loss, which is a measure of effectiveness of energy utilisation and loss control by refineries worldwide, improved in 2010 at 5.8% against 6.2% in 2009. In general, fuel and loss indicates how much fuel we have used for each ton of crude processed. It is measured as a percentage of crude processed and natural gas consumed. Lower fuel and loss indicates higher energy efficiency and better control of losses which in turn positively impacts refinery margins. The Company believes its fuel and loss is one of the lowest amongst Indian refineries.

Throughput (MMT)

Production (MMT)

asset 2010 2009 2010 2009

Vadinar 14.7 13.2 13.9 12.4

Mombassa 1.6 1.6 1.5 1.5

In 2010, production of BS-III and BS IV grades of gasoil helped sustain a high margin. In Marketing, we have 1,385 operational retail fuel outlets and 250 under construction. In 2010 we commissioned our first auto-LPG outlet. Agreements have been signed with Gujarat State Petroleum Corporation Limited, Gas Authority of India Limited and Sabarmati Gas Limited for setting up compressed natural gas facilities in Essar Oil retail fuel outlets across India. Together with higher production, we had sales of 13.8 mmt in 2010 against 12.3 mmt in 2009. In 2010, we further consolidated our position in bitumen, having sold 537.8 kt (2009: 111.8 kt) of the product, our highest ever.

ebitDaEBITDA represents earnings before interest, tax, depreciation and amortisation and any non-operational items. Non-operational items include the foreign exchange gain on conversion of the IPO proceeds into US dollars, the profit on available for sale investments and the gain on settlement of liabilities. The reconciliation to profit after tax is shown in the table below:

year ended 31 December (US$ million)

Group Power Exploration and Production Refining and Marketing Centre

2010 2009 2010 2009 2010 2009 2010 2009 2010 2009

Profit after tax 248.3 206.8 74.1 54.0 (1.1) (8.9) 148.1 161.7 27.2 –

Depreciation and amortisation 127.0 114.0 42.2 35.9 0.3 0.1 84.5 78.0 – –

Net finance costs 287.4 283.8 67.5 52.6 1.9 0.3 218.8 230.9 (0.8) –

Tax 117.2 78.9 37.6 13.7 – 0.5 75.1 64.7 4.5 –

Other non-operational items (61.0) (19.8) (7.9) – – – (11.8) (19.8) (41.3) –

EBITDA 718.9 663.7 213.5 156.2 1.1 (8.0) 514.7 515.5 (10.4) –

Essar Energy’s overall EBITDA increased by US$55.2 million representing a growth of 8% year on year. The business drivers behind EBITDA are set out in the following section.

ebitDa – power Power’s EBITDA for 2010 increased by US$57.3 million to US$213.5 million from US$156.2 million in 2009, an increase of 37%. This was primarily due to a full year’s operation of the Algoma power plant, sales under ABT and increased fixed charges in Bhander Power under the terms of the power purchase agreement.


ebitDa – exploration and productionExploration and Production achieved an EBITDA of US$1.1 million in 2010 compared to US$8.0 million loss in 2009 mainly as a result of a reduction in foreign exchange losses as well as revenues derived from the provision of manpower services to other Essar affiliated companies.

ebitDa – refining and marketing Refining and Marketing EBITDA for 2010 decreased by US$0.8 million to US$514.7 million from US$515.5 million in 2009. This was primarily due to improvements in the GRM year on year by US$161.0 million, offset by an increase of US$17.5 million in operating costs, a decrease in traded margin of US$30.0 million, lower foreign exchange gains in 2010 of US$96.0 million and increase in product handling charges of US$14.7 million due to an increase in quantities sold.

refining and marketing cp ebitDa and cp GrmFor further understanding of our Refining and Marketing operations we also present its EBITDA on an adjusted internal measure using the CP GRM, as defined below. CP GRM is not calculated under IFRS, but management believes that this information should be provided as it enables investors to better understand the underlying performance of the Vadinar refinery.

The differences between CP EBITDA and EBITDA for the Refining and Marketing operations are set out in the table below:year ended 31 December (US$ million) 2010 2009

cp ebitDa (excluding sales tax benefit) 218.1 145.9

Add sales tax benefit 281.3 212.9

cp ebitDa (including sales tax benefit) 499.4 358.8

Impact of:

Timing differences in pricing domestic products (99.1) (112.4)

Time lag in crude prices 71.4 173.7

Impact of duty (0.5) –

Impact of inventory movement 45.5 103.7

Hedging gain (2.0) (8.3)

ebitDa – refining and marketing (including sales tax benefit) 514.7 515.5

The GRM is calculated as actual sales net of crude costs derived from the accounts. Inventory gains and losses, hedging gains and losses and sales tax benefit for the period also form part of the GRM. Based on this method of calculation, Essar Energy’s GRMs are not directly comparable to the performance of other refiners, other refining benchmarks and industry as further discussed on in Appendix 1 on page 116.

The Refining and Marketing operations’ results (including the impact of sales tax benefit) are as follows:year ended 31 December 2010 2009

CP GRM (US$ million) 708.2 405.6

CP GRM (US$ per barrel) 6.6 4.2

CP EBITDA (US$ million) 499.4 358.8

EBITDA (US$ million) 514.7 515.5

CP GRM has increased from US$4.2 per barrel to US$6.6 per barrel, whilst CP EBITDA (including sales tax) increased by US$140.6 million from US$358.8 million in 2009 to US$499.4 million in 2010, as a result of additional sales tax benefit due to higher sales in Gujarat and higher underlying product prices.

net finance costsyear ended 31 December (US$ million) 2010 2009

total finance costs (471.7) (363.4)

Less: borrowing costs capitalised 154.6 62.0

Unwinding of discount (19.5) (8.4)

finance cost charged to the income statement (336.6) (309.8)

total finance income 64.2 28.8

Less: interest income capitalised (15.0) (2.8)

finance income recognised in the income statement 49.2 26.0

net finance costs (287.4) (283.8)

financial review continued


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Net finance costs comprise of US$336.6 million (2009: US$309.8 million) of finance costs charged to the income statement and finance income of US$49.2 million (2009: US$26.0 million). Net finance costs have remained relatively flat year on year with an increase of US$3.6 million as the rise in total finance costs of US$108.3 million mostly negated by an increase in net interest income of US$23.2 million, as a result of interest received on IPO net proceeds, as well as the increase in interest capitalised of US$92.6 million in respect of costs directly attributed to assets under construction.

taxationThe income tax charge of US$117.2 million in 2010 comprises current tax of US$30.6 million (2009: US$2.8 million) and deferred tax of US$86.6 million (2009: US$76.1 million). The current tax charge has increased by US$27.8 million primarily due to an increase in profits which are subject to corporate income tax or Minimum Alternative Tax (‘MAT’), as appropriate. The majority of profits derived from companies in India are subject to MAT. MAT is charged on book profits in India at a rate of 19.93%, but is available as a credit against corporate income tax in the following 10 years. The deferred tax charge of US$86.6 million (2009: US$76.1 million) in 2010 is mainly on account of property, plant and equipment and the impact of unabsorbed depreciation. The Group’s 2010 effective tax rate was 32% compared with the 2009 rate of 28%.

non-operational itemsNon-operational gains have increased by US$41.2 million to US$61.0 million in the current period compared to US$19.8 million in 2009. Further non-operational gains in 2010 are largely driven by a foreign exchange gain of US$41.3 million (2009: nil) from the conversion of the IPO proceeds into US dollars, profit on sale of available for sale investments of US$11.2 million (2009: nil) as part of the reorganisation of the Group prior to IPO, the gain on settlement of liabilities with third party banks of US$10.1 million (2009: nil) and a US$19.1 million reduction as a result of one off gains in the prior year relating to surplus on acquisition of a joint controlled entity, Kenya Petroleum Refinery Limited.

profit after taxProfit after tax has increased by US$41.5 million, representing a 20% growth, from US$206.8 million in 2009 to US$248.3 million in 2010 as a result of improvements in the operations as discussed above. Earnings per share of 17.1 cents in 2010 is broadly in line with the calculated value for 2009 of 17.0 cents per share despite the increase in earnings as the number of shares have increased post IPO. Further information on earnings per shares is included in Note 10.

balance sheetas at 31 December (US$ million) 2010 2009

Property, plant and equipment (net of depreciation) 8,411.8 5,453.9

Other non-current assets 698.8 426.4

Current assets 3,363.6 2,135.5

total assets 12,474.2 8,015.8

Current liabilities 2,772.0 3,453.7

Non-current liabilities 5,060.1 2,523.3

total liabilities 7,832.1 5,977.0

total equity including non-controlling interests 4,642.1 2,038.8

Gross debt 4,497.6 3,109.0

Cash and cash equivalents 563.7 71.4

net debt 3,933.9 3,037.6

Total equity 4,642.1 2,038.8

Gearing % (net debt/(net debt + total equity)) 45.9 59.8

property, plant and equipment as at 31 December 2010 2009

(US$ million) (Net book value) operational

assets under construction total Operational

Assets under construction Total

Power 806.8 2,856.2 3,663.0 758.9 838.4 1,597.30

Exploration and Production 46.1 160.1 206.2 40.1 107.3 147.4

Refining and Marketing 3,203.9 1,338.7 4,542.6 3,096.0 613.2 3,709.2

totals 4,056.8 4,355.0 8,411.8 3,895.0 1,558.9 5,453.9

Property, plant and equipment has increased by US$2,957.9 million in 2010, a 54% year on year growth, largely reflecting US$2,017.8 million and US$725.5 million of additions as part of the Power and Refining projects, respectively, currently under construction as well as US$52.8 million of expenditure in respect of Exploration and Production projects.


property, plant and equipment – powerProperty, plant and equipment include US$2,856.2 million capitalised in respect of power expansion projects, an increase of US$2,017.8 million against 2009. Power plants under construction also comprise of the acquisition of the Aries coal mine (US$118.0 million) in Indonesia, US$155.1 million in respect of the Navabharat Power project (including US$50.2 million acquisition consideration) and US$29.9 million acquisition of the Mozambique mine.

property, plant and equipment – exploration and productionA further US$52.8 million of capital expenditure has been recognised in respect of the Raniganj block, the Ratna fields, and various other blocks. Further, foreign exchange translation differences of US$6.0 million have also increased property, plant and equipment. There were no impairments of Exploration and Production assets in the period, in line with the prior year.

property, plant and equipment – refining and marketingThe Vadinar refinery Phase 1 project resulted in additions of US$725.5 million in 2010, with cumulative assets under construction of US$1,338.7 million at 31 December 2010 (2009: US$613.2 million). Additionally, foreign exchange translation differences of US$178.0 million (2009: US$140.0 million) have further increased property, plant and equipment as compared to 31 December 2009.

other non-current assetsOther non-current assets have increased by US$272.4 million year on year primarily as a result of further sales tax assignment liability paid and increased arrangement fees for currently unutilised debt facilities for use on our expansion projects. Other non-current assets include US$275.1 million (2009: US$121.6 million) which reflects sales tax assignment liability paid to a related party. The related party has committed to discharge the sales tax liability as it falls due in accordance with the sales tax incentive scheme as detailed in Note 28 of the financial statements.

current assetsCurrents assets have increased by US$1,228.1 million to US$3,363.6 million year on year primarily as result of the following:

increase of US$492.3 million and US$221.8 million in cash and cash equivalents and other financial assets following receipt ¸¸

of IPO funds after partial utilisation to fund expansion projects in 2010; increase of US$330.1 million and US$230.1 million in inventories and trade and other receivables due to an increase in crude ¸¸

oil prices and value of refinery products as well as record throughput in 2010; andUS$41.3 million reduction in available for sale investment following the disposal of Essar Steel Limited shares and other ¸¸

investments during 2010 at fair value.

current liabilities Current liabilities reduced by 20% to US$2,772.0 million year on year partly driven by a reclassification of acceptances from short term to long term trade and other payables of US$560.7 million, discussed further below, as well as US$168.9 million reduction in short term borrowings in line with the strategy to secure long term borrowings.

non-current liabilitiesNon-current liabilities have increased by US$2,536.8 million, representing a 100% increase year on year primarily due to the following:

US$560.7 million of acceptances were transferred from current to non-current trade and other payables reflecting a change ¸¸

in maturity where these will be converted to long term rupee facilities on expiry;US$101.9 million increase on the discounted sales tax liability following further sales made in the period; ¸¸

US$1,557.5 million increase in long term borrowings in line with funding requirements in respect of expansion projects, further ¸¸

discussed in the capital and liquidity section below; US$119.6 million rise in deferred tax liabilities driven primarily by the impact of property, plant and equipment as well as ¸¸

unabsorbed depreciation and business combination acquisitions; and US$197.1 million increase in other non-current liabilities including US$136.0 million due to related parties principally in respect ¸¸

of construction works and supply of equipments.

cash flowsyear ended 31 December (US$ million) 2010 2009

operating cash flow 652.7 478.1

tax paid (10.4) (5.5)

change in working capital assets and liabilities (904.1) (189.6)

Purchase of property, plant and equipment (net of disposals) (2,556.2) (482.4)

Other investments (55.8) (157.6)

net cash used in investing activities (2,612.0) (640.0)

net interest paid (309.1) (228.8)

free cash flow (3,182.9) (585.8)

Equity infusion 2,442.5 108.7

total cash change before net borrowings (740.4) (477.1)

financial review continued


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Essar Energy’s operating cash flow increased from US$478.1 million in 2009 to US$652.7 million in 2010, an increase of US$174.6 million, or 36%. The increase is primarily driven by an increase in profit before tax and increase in operational activity, which has benefited from improved profits from the Power business, record refinery throughput and improved year on year GRM.

Net cash used in investing activities has increased by US$1,972.0 million from US$640.0 million in 2009. This reflects the Company’s investment in its Refining and Power expansion projects and expenditures for Exploration and Production activities. Additionally interest paid has increased by 35% year on year reflecting the Company’s utilisation of available debt facilities to fund expansion projects.

Equity infusion of US$2,442.5 million represents the promoter investments of US$630.2 million in the Power, Exploration and Production and Refining and Marketing businesses prior to the Group’s formation, and IPO net proceeds of US$1.8 billion.

capital and liquidityDuring the year, the Group raised equity of US$1.9 billion through its IPO. Capital of US$717.2 million, US$55.0 million and US$440.0 million was invested in the Power, Exploration and Production and Refining and Marketing business segments during the year, respectively. The surplus cash was invested in high rated liquid funds and bank deposits in line with the Group’s financial and risk policy as well as the provision of US$225.0 million of trade advances to the Refining and Marketing businesses for working capital requirements. as at 31 December (US$ million) 2010 2009 Change %

Gross debt 4,497.6 3,109.0 45

Cash and cash equivalents 563.7 71.4 689

net debt 3,933.9 3,037.6 30

Total equity 4,642.1 2,038.8 128

Gearing % (net debt/(net debt + total equity)) 45.9 59.8

The Group has net debt of US$3,933.9 million (2009: US$3,037.6 million) and gearing of 45.9% (2009: 59.8%). The gearing ratio has reduced by 23% year on year largely as a result of an increase in equity and cash and cash equivalents following the IPO. It is anticipated that the Group’s gearing will increase in future periods once further financing is drawn to fund capital expenditure on expansion projects.

During the year, the Group raised project financing of US$4,316.3 million, US$127.9 million and US$252.8 million for the expansion projects of the Power, Exploration and Production and Refining and Marketing business segments, respectively. At 31 December 2010, the Group had US$750.0 million (2009: US$918.9 million) of short term borrowings outstanding.

The majority of the borrowings are for the Power business and are project financing facilities with limited recourse to the Company. Additionally, the majority of the arranged facilities are in Indian rupees to match the revenue streams for the Power business thereby reducing exchange rate risk. The Group continues to be able to borrow at competitive rates for working capital and expansion projects.

Post year end, the Group also raised US$550 million through a convertible bond issue which has further strengthened the liquidity position of the Group. This demonstrates the Group’s ability to manage its capital and liquidity position and to capitalise on market opportunities as they arise.

Going concernThe Group closely monitors and manages its liquidity risk. In assessing the Group’s going concern status, the Directors have taken account of financial position of the Group, anticipated future trading performance, its bank and other facilities, its capital investment plans, forecast gross refining margins and the likelihood of any material adverse legal judgements. The IPO in 2010 and our recent convertible bond issue of US$550 million in February 2011 have further strengthened the Group’s financial position and ability to meet its financial obligations as they fall due.

The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current available funding. As set out in Note 27 to the financial statements, the Group believes it has a high likelihood of success in the sales tax litigation but if it were unsuccessful, the Directors are confident that the Group can manage its financial affairs, including securing additional funding and reaching agreement with lenders, so as to ensure that sufficient funding remains available for the next 12 months.

On this basis, after making appropriate enquiries, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the 2010 accounts.


principal risks and uncertainties

Effective risk management is integral to delivering our strategic goals, whilst protecting our reputation and shareholder value.

Following the detailed risk review undertaken as part of the IPO process, the Board has made significant progress in implementing a robust risk management framework which not only serves to identify and monitor risks across our business, but also to establish specific management controls to reduce the incident and impact of those risks.

approach to risk management The overall responsibility for risk management and determination of appetite to undertake activities subject to risk and uncertainty resides with the Board of Essar Energy. However, given the nature of our business, the boards of our divisions and key management personnel across the Company play an important part in managing and monitoring risks. The Company has established formal policies to promote an environment of good governance and robust risk management.

The Board has established a risk register that identifies strategic risks together with financial, operational and compliance risks. The register includes a description of the nature, extent and implication of the risks together with the related management controls. The effectiveness of management controls has been considered in 2010, with supporting documentation provided by those responsible for monitoring specific risks within the business. The controls over risk management have also been subject to internal audit in 2010 with no significant weaknesses identified in respect of the Company’s policies and procedures.

ongoing monitoring of risksThe risk register is formally reviewed by the Board on a half yearly basis to monitor principal risks and the strategies deployed to mitigate them. Ongoing monitoring and management of risks takes place on a monthly basis at the

Management Committee meetings where the Chief Executive and Chief Financial Officer of Essar Energy along with divisional senior management discuss key developments and new risk arising within the underlying business divisions. Similarly, the developments in risks impacting the Company at corporate level are discussed at each Board meeting. The Audit Committee is also charged with monitoring effective implementation of controls across the business that specifically impact financial risks.

Further details of the procedures undertaken by the Board of Essar Energy and its Committees are set out in the Corporate Governance report.

There are a number of risks and uncertainties which could have an impact on the Company’s results and operations in light of the nature of the industries in which our businesses operate. Our principal risks are:

Group-wide risksrisK¸¸ implication¸¸ mitiGation¸¸

Compliance with regulation and obtaining licenses and permits

All of the Company’s operations ¸¸

are extensively regulated and the delivery of our strategy is largely dependent on obtaining the appropriate permits, approvals and licenses to complete our expansion projects, complying with their conditions and the exploration and development of oil, gas and coal blocks. The failure to obtain or comply with the terms of such permits and approvals would prevent the Group from achieving its growth targets and could ultimately lead to the impairment of existing assets.

The Company closely monitors ¸¸

compliance with regulatory requirements across its business and heads of each division and operations confirm compliance with all applicable laws and regulations. The need for permits, approvals ¸¸

and licenses for expansion projects and the exploration and development of oil, gas and coal blocks is assessed prior to undertaking any works or investments. The ability to obtain the necessary regulatory approvals to successfully deliver our strategic goals on time is largely out of the control of Management. However, Essar continues to have a successful working relationship with national, state and local authorities and expects to obtain all necessary approvals.


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Group-wide risks (continued)risK¸¸ implication¸¸ mitiGation¸¸

Our ability to complete major projects on time and within budget

The Company is reliant on the ¸¸

completion of major projects to maintain its projected growth levels. In particular, there is a need to ensure projects are managed on time, including the delivery by contractors and suppliers, and within budget using efficient technologies to achieve the required specifications. If projects are not executed on time and to budget, the planned growth and profitability of the Group will not be achieved.

The Company has outsourced the ¸¸

management and construction of major projects to specialist expert project management and EPC contractors who are related parties. The risk of overruns is further mitigated through entering turnkey contracts with these contractors and suppliers. Progress on all major projects ¸¸

is monitored on a monthly basis by the relevant project review managers who report to the Project Management Committee. Key concerns are reported to the Essar Energy Management Committee and ultimately the Board, where actions to be undertaken are considered and agreed.

Funding requirements for future growth

The Company operates in a ¸¸

capital intensive industry and has significant financing requirements. This requires continued access to commercial banking facilities, capital markets and maintenance of short term working capital funding as well as continued compliance with banking covenants. The Company also needs to ¸¸

service debt raised on a timely basis. The servicing of working capital funding is dependent on timely payments from customers whilst specific debt raised for expansion projects largely depends on timely completion of related projects. If the Group does not have access to funds or fail to service its debt on a timely basis it could put at risk its status as a going concern.

The completion of the IPO in 2010 ¸¸

as well as the convertible bond issue announced in January 2011 has significantly improved the Company’s liquidity position and ability to meet equity financing requirements. Essar continues to have a strong relationship with banks putting the business in a strong position to raise necessary debt financing for our projects and operations.The Company also maintains ¸¸

working capital and cash flow projections to identify funding requirements and ensure facilities are available to meet short term funding needs. The risk of funding shortfalls is further mitigated by arranging debt in India where standard market practice is to automatically roll over facilities unless circumstances significantly change. The Group has historically successfully rolled over facilities in line with market practice and retains good banking relationships. In addition, banking covenants ¸¸

are monitored on an ongoing basis to ensure compliance. Servicing of specific debt raised ¸¸

for expansion projects is managed through agreeing repayment profiles consistent with the timeline for completion of related projects.



Our ability to retain tax incentives in the future

The Company currently enjoys, ¸¸

in the form of tax holidays, exemptions and subsidies, the benefit of various tax incentives provided by the Indian Federal and state authorities designed to encourage investment in the power and oil and gas sectors. These incentives have a material impact on the investment returns on the Company’s existing and planned power plants, exploration and production projects, and the Vadinar refinery. In addition, the Company is currently engaged in litigation with the Government of Gujarat, which has been appealed to the Supreme Court, in respect of deferment of payment of certain sales taxes. The Company’s results and ¸¸

financial position would be materially adversely affected should claims for these benefits be disallowed.

The Company continues to monitor ¸¸

changes and developments in respect of incentives provided by the Indian Federal and state authorities. Project investment returns are evaluated based on the expected incentives available to the Company and are revised based on the most up to date guidance available. In respect of the deferment of payments of certain tax incentives within the State of Gujarat, the Company has received a favourable legal opinion and judgement at the High Court and believes its position to be supportable and justified within the appeal process. The matter continues to be monitored closely with appropriate provisions being considered at each financial reporting period end.

Reliance on Essar Global and affiliated Essar companies as major suppliers and customers and managing conflicts of interest

The Power business, in particular, ¸¸

is dependent on Essar Group companies as major suppliers and customers. The loss of this relationship could have a significant impact on the Group’s continued success. In addition, as the controlling shareholder, Essar Global may have conflicting interests with the Company. This could lead to transactions being entered into that would not be in the best interests of the Group.

The Company has a close ¸¸

working relationship with Essar Global with representation of senior Essar Global members on the Board. There are also long term contractual arrangements with Essar Global and other Essar companies to ensure the Company’s interests remain protected.

principal risks and uncertainties continued


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Commercial and reputational damage as a result of Health, Safety or Environmental incidents or conflicts with local communities

The Company is at risk of ¸¸

commercial and reputational damage as a result of Health, Safety or Environmental incidents given the nature of its operations. Further, relationships built with local communities in locations where the Company operates needs to be maintained to avoid any operational disruptions. The loss of confidence any incident might create could have an adverse effect on the overall valuation of the Group and its ability to work effectively with local and national authorities.

The Company has a formal Health, ¸¸

Safety and Environmental policy with related HSE management systems in place. These are communicated to the relevant businesses and employees with training provided on a regular basis. Regular reviews are carried ¸¸

out on compliance with the HSE policy and related HSEMS as well as adherence with regulatory requirements. The HSE Committee reports directly to the Board, which ultimately monitors the effectiveness of various policies and systems. Tools are in place to monitor ¸¸

emissions from plants and the refinery. Medical expertise and support is available at all locations.The Company works closely with ¸¸

local communities to maintain relationships and to ensure that concerns are heard and acted upon on a timely basis.

Fluctuations in foreign exchange rates

The price of feedstock, natural ¸¸

gas, imported coal and crude oil needed to run the Group’s power operations and for the production of refined petroleum products are generally denominated in or tied to the US dollar, with other operating expenses denominated in rupees.Additionally, the Company’s ¸¸

functional and presentational currency is the US dollar. Therefore, it also faces translation risk to the extent assets, liabilities, revenues and expenses of its subsidiaries are denominated in currencies other than the US dollar. Whilst the Company’s results are ¸¸

presented in US dollars, dividends to shareholders will be paid in pound sterling in the future. As such changes in the ¸¸

exchange rates could significantly impact both the operational and reported results.

The business enters into forward ¸¸

foreign exchange contracts to cover foreign currency payments and receipts as well as to manage foreign exchange risks associated with anticipated sales and purchase transactions. The Management Committee monitors the level of exposure to foreign exchange rate fluctuations across the business and makes recommendations in respect of future hedging. Formal strategic polices are under implementation to define the business’ appetite for foreign exchange fluctuation, which will be rolled out across the Company going forward.


Oil and gas business risksrisK¸¸ implication¸¸ mitiGation¸¸

Fluctuation of crude oil prices, refined petroleum products prices and refining margins

The Oil business is dependent ¸¸

on the margin between crude oil prices and refined petroleum product prices to maintain profitability. Operating efficiency and access to crude oil of the required quantity, quality and prices has a significant impact on the Company’s performance. Whilst refined product normally tracks changes in feedstock prices, there is normally a lag which could seriously impact short term working capital and profitability.

The Oil business uses long term ¸¸

contracts as well open international markets to source crude oil at competitive prices. Management prepare four month rolling plans on a weekly basis to identify any changes in risk profile and take appropriate action on a timely basis. The use of commodity hedging further reduces fluctuation in refining margins. Other methods are also used by the Oil business to drive down costs such as increase in the use of cheaper tough crudes and use of blending of different grades to improve the product slate as well as increasing production efficiency through technological advances.

Exposure to adverse weather conditions and natural disasters

The Company has experienced ¸¸

delays in both operational activity and completing projects as a result of adverse weather conditions. The locations of the major assets are in areas that are subject to adverse weather conditions and/or natural disaster. The hazardous nature of the Company’s operations exacerbates the impact of adverse weather and natural disaster. This could result in the shutting down of major assets with consequent failure to maintain profitability and requiring additional capital to bring the asset back into its former state.

Management undertakes a ¸¸

detailed risk assessment prior to the commencement of major projects that considers the potential for adverse weather and natural disaster.In addition, business continuity ¸¸

measures, in accordance with the Business Continuity policy and Crisis Management procedures, are in place for locations and ongoing projects at risk. Appropriate insurance is also ¸¸

taken to further reduce the exposure to adverse weather conditions and natural disasters.

principal risks and uncertainties continued


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Power business risksrisK¸¸ implication¸¸ mitiGation¸¸

Timely access to coal and other fuel supplies at appropriate prices

The Company requires access ¸¸

to coal and other fuel supplies at appropriate prices in order to generate profits from its Power expansion projects as well as its existing power plants. Whilst the Power expansion projects have captive supplies identified, a delay in obtaining permissions to extract coal may result in the need to purchase temporary supplies at regulated or market prices. This could have a significant impact on profitability.

The Company will be able to ¸¸

source coal internally once the available 450 tonnes of coal resources can be developed. In the short term, the Company will secure temporary supply through tapering coal linkages, third party contracts and market purchases.

Power plant availability and profitability

The Power business’ profitability ¸¸

is largely a function of its ability to operate its power plants to ensure availability under the terms of the Power Purchase Agreements. The failure to achieve required availability levels would have a direct impact on profitability and cash flow.In addition, the Power business ¸¸

seeks to expand further into the merchant sales market which will not provide the Company with the same level of protection for fixed and variable costs involved in generating power, as currently received under PPAs, and may be subject to seasonality. This would result in less certainty when projecting profits and cash flow.

The plants’ availability levels ¸¸

are continually monitored to ensure issues are highlighted and addressed with immediate effect. The low average age of the Company’s plants and regular maintenance enhance efficiency levels. Costs are also managed through fixed supply agreements and secured fuel supply. The Company intends to supply ¸¸

power for merchant sales from the lowest cost power stations in order to ensure the profitability of these plants even at low merchant prices.

Reliance on a few major customers

The Power business supplies to a ¸¸

small number of large customers under PPAs. In particular, there is a significant relationship with GUVNL in respect of the provision of power. The Company has in the past experienced payment difficulties for services provided to GUVNL which, if continued could have a significant impact on the Company’s results. There is also an ongoing litigation case with GUVNL, which may result in financial losses.

The litigation with GUVNL ¸¸

continues to be ongoing at the date of this report. To date the court rulings have been largely in favour of the Company and Management consider the need for appropriate provisions at financial reporting period end.The Company has tight ¸¸

monitoring controls over receipt of overdue amounts from customers and litigation is undertaken where necessary.


Directors’ report

The Directors have the pleasure in presenting their annual report and audited accounts for the period ending 31 December 2010. The information contained in the Business review, Board of Directors, the Corporate Governance report and the Statement of Directors’ responsibilities forms part of the Directors’ report.

Principal activitiesEssar Energy is a world-class, low-cost, India-focused energy company with an established track record and US$12 billion of assets across the power and the oil and gas industry. It has been created by combining the existing energy portfolio of the Essar Group, a diversified Indian business group established over 40 years ago. The Group comprises three divisions:

Power;¸¸

Exploration and Production; and¸¸

Refining and Marketing.¸¸

Business reviewA detailed Business review for the Group as required by section 417 of the Companies Act 2006 can be found in the sections of this annual report listed below, which are incorporated into this Directors’ report by reference. These comment on the operation and development of the business and its future prospects along with details of key performance indicators and the description of the principal risks and uncertainties facing the Group.

Highlights on page ¸¸ 01;Chairman and Vice Chairman’s statement on pages ¸¸ 02 to 03;Chief Executive’s report on pages ¸¸ 04 to 05;Essar Energy at a glance on pages ¸¸ 06 to 07;Our strategic position on pages ¸¸ 12 to 13;Review of the businesses on pages ¸¸ 14 to 19;Market overview on pages ¸¸ 20 to 23;Our strategy and performance on pages ¸¸ 24 to 25;Operating review on pages ¸¸ 26 to 31;Corporate responsibility on pages ¸¸ 32 to 37;Financial review on pages ¸¸ 38 to 43; andPrincipal risks and uncertainties on pages ¸¸ 44 to 49.

This Business review and other sections of this annual report contain forward looking statements. The extent to which the Company’s shareholders or anyone may rely on these forward looking statements is set out inside the back cover of this annual report.

Corporate governanceThe Company is required to comply with the Combined Code on corporate governance published in June 2008 by the Financial Reporting Council or explain its reasons for non-compliance. A report on corporate governance and compliance with the provisions of the Combined Code is set out on pages 54 to 60.

DividendsA final dividend for the year ended 31 December 2010 has not been declared.

Relationship agreementPrior to Listing, Essar Energy was a wholly owned subsidiary of Essar Global. On 30 April 2010 Essar Energy and Essar Global entered into a relationship agreement to regulate the ongoing relationship between the Company and Essar Global. The principal purpose of the Relationship Agreement is to ensure that the Group is capable of carrying on its business independently of Essar Global and its associates (for the purpose of this summary, as defined in the Relationship Agreement) and that transactions and relationships are at arm’s length and on normal commercial terms (other than certain de minimis transactions).

The Relationship Agreement will continue for so long as the ordinary shares are listed on the premium listing segment of the Official List and traded on the LSE and Essar Global, together with its associates, have an aggregate interest at least of 30% in the issued shares of Essar Energy.

The key terms of the Relationship Agreement are set out in Appendix 2 of this Report on page 116.

The Directors believe that the terms of the Relationship Agreement will enable the Company to carry on its business independently from the Essar Group and its associates.

DirectorsThe names and biographies of the current Directors of the Company are set out on pages 08 to 10.

The Company was incorporated on 18 December 2009. Mr Raman Jaggi was appointed as a Director when the Company was incorporated and resigned as a Director on 6 April 2010 when the current Board was appointed.

Directors’ appointment and retirementThe Directors may from time to time appoint one or more Directors. Any such Director shall hold office only until the next Annual General Meeting (‘AGM’) and shall then offer themselves for election by the Company’s shareholders. In accordance with the Company’s articles of association, which require the Directors to retire and offer themselves for election by shareholders at the first AGM after their appointment, all the Directors will be offering themselves for election at the forthcoming AGM. This is also in accordance with current best practice as outlined in the UK Corporate Governance Code which applies to the Company from 1 January 2011 and provides for all directors of FTSE 350 companies to be subject to election or re-election by their shareholders every year.

Directors’ indemnities and insuranceDirectors and officers are indemnified under the articles of association of the Company, to the extent permitted by the Companies Act 2006. In addition, the Company has entered into deeds of indemnity with each Director in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act 2006. The Company has also purchased Directors’ and Officers’ liability insurance which remains in place at the date of this report.


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Directors’ interestsThe number of ordinary shares of the Company in which the Directors (or a person connected with a Director) were beneficially interested, as at 31 December 2010, were as follows:

31 December 2010

Mr Ravi Ruia see below1

Mr Prashant Ruia see below1

Mr Naresh Nayyar 204,4442

Mr Philip Aiken 14,285Mr Sattar Hajee Abdoula 23,809Mr Simon Murray 71,428Mr Subhash Lallah 0

1 Mr Ravi Ruia and Mr Prashant Ruia have an indirect interest in the Company. Essar Global has beneficial interests in 1,000,000,000 ordinary shares (76.72%) of the Company. The ultimate shareholders of EGL are the Virgo Trust and the Triton Trust, discretionary trusts, whose beneficiaries include, among others, companies whose 100% shareholders are Mr Ravi Ruia and Mr Prashant Ruia. EGL also acquired an economic interest in up to a further 16,973,961 Ordinary Shares of the Company on 18 January 2011 pursuant to an Equity Swap Transaction as part of the convertible bond arrangements (see ‘Post balance sheet events’ on page 52).

2 Outstanding executive share option awards held by Mr Naresh Nayyar, further details of which are set out in the Remuneration report on page 63.

No Director had any dealings in the shares of the Company between 31 December 2010 and 18 March 2011, being a date less than one month prior to the date of the notice convening the AGM.

share capitalDetails of the Company’s share capital are set out in Note 22 to the financial statements. The issued share capital of the Company at 31 December 2010 was 1,303,437,293 ordinary shares of 5 pence each. The Company is listed on the London Stock Exchange and was included in the FTSE 100 index of leading shares listed on the Main Market of the LSE in June 2010.

Since the Company was formed it has issued 1,000,000,000 fully paid ordinary shares to Essar Global for a total of US$1,491.1 million together with 303,030,302 fully paid ordinary shares at a price of £4.20 per share in the initial public offering on 7 May 2010. A further 406,991 ordinary shares were issued to Essar Global on 4 June 2010 pursuant to the exercise of an over-allotment option at the initial public offering price of £4.20 per share. The rights and obligations attached to these shares are governed by English law and the Company’s articles of association.

powers of Directors The Directors were given authority by a shareholders’ resolution passed at a general meeting held in April 2010 to allot up to an aggregate nominal amount of £21,717,171.67 being an amount equal to one third of the ordinary share capital of the Company in issue immediately prior to Listing. The Company was also authorised by a shareholders’ resolution to purchase up to 130,303,030 ordinary shares representing 10% of its issued ordinary share capital immediately following Listing. These authorities will expire at the forthcoming AGM to be held in May 2011 and resolutions to renew the authority for a further year will be proposed. No shares were purchased by the Company during the period from Listing to 31 December 2010.

voting rightsOrdinary shareholders are entitled to receive notice and to attend and speak at any general meeting of the Company. On a show of hands every shareholder present in person or by proxy (or being a corporation present by a duly authorised representative) shall have one vote, and on a poll every shareholder who is present in person or by proxy or (in the case of a corporate member) by a duly authorised representative) shall have one vote for every share of which he is the holder.

A shareholder entitled to attend and vote at a general meeting may appoint one or more proxies to attend and vote instead of him. If a member appoints more than one proxy he must specify the number of shares which each proxy is entitled to exercise rights over. A proxy need not be a shareholder of the Company.

variation of rightsSubject to the Companies Act 2006, whenever the share capital of the Company is divided into different classes of shares, the rights attaching to any class of shares may be varied with the consent in writing of the holders of three-quarters in nominal value of the issued shares of the class or with the sanction of a special resolution passed at a separate general meeting of the shareholders.

transfer of sharesEssar Global and the Directors are subject to a lock-up arrangement in accordance with an underwriting agreement dated 30 April 2010 and related arrangements under which they are not permitted to sell their shares for a period of 365 days following the Listing.

The Company itself is also subject to a lock-up arrangement pursuant to the Underwriting Agreement. The Company has agreed that, subject to certain exceptions, during the period of 365 days from Listing, it will not, without the prior written consent of the joint global coordinators and the Sponsor, issue, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, any shares (or any interest therein) or enter into any transaction with the same economic effect as any of the foregoing.

As at 31 December 2010, there were no further restrictions on the transfer of the ordinary shares other than as set out in the articles of association and certain restrictions that may from time to time be imposed by laws and regulations and pursuant to the Listing Rules of the Financial Services Authority whereby certain Directors, officers and employees of the Company require the approval of the Company to deal in the ordinary shares.

On 18 January 2011, the Company entered into an additional lock-up arrangement in relation to the convertible bond issue (referred to under ‘Post balance sheet events’ on page 52) under which it agreed that, subject to certain exceptions, it will not, during the period of 60 days from the date of agreement, issue, offer, sell or contract to sell or otherwise dispose of, directly or indirectly, any ordinary shares (or any interest therein) or enter into any transaction with a similar economic effect as any of the foregoing.


No shareholder holds securities carrying special rights as to the control of the Company. There are no limitations on the holding of securities. Other than those defined in the Relationship Agreement there are no restrictions on voting rights or any arrangements by which, with the Company’s cooperation, financial rights carried by securities are held by a person other than the holder of the securities. There are no agreements between holders of securities that are known to the Company which may result in restrictions on the transfer or on voting rights.

major interests in sharesAs at 18 March 2011, the Company had been notified, in accordance with the Disclosure and Transparency Rules of the Financial Services Authority, of the following notifiable interests of 3% or more (whether directly or indirectly held) in its voting rights:

number of voting rights %

Essar Global1 1,000,000,0002 76.72

1 The ultimate shareholders of Essar Global are the Virgo Trust and the Triton Trust, discretionary trusts, whose beneficiaries include, among others, companies whose 100% shareholders are Mr Ravi Ruia and Mr Prashant Ruia.

2 On 18 January 2011, Essar Global acquired an economic interest in a further 16,973,961 shares pursuant to an equity swap transaction as part of the convertible bond arrangements (see ‘Post balance sheet events’ below).

essential contractsThe Company has entered into long term refined petroleum product off-take agreements, which together accounted for 52% of the Group’s net sales, with the following Indian national oil companies: a four year agreement with Bharat Petroleum Corporation Limited effective from April 2008, a four year agreement with Hindustan Petroleum Corporation Limited effective from January 2008 (extendable by one year) and a two year agreement with Indian Oil Corporation Limited effective from April 2009, the renewal of which is currently being negotiated. Under the terms of these agreements, the Company is not guaranteed any binding minimum off-take quantity from the Indian national oil companies, however, due to the pricing terms for sales to the Indian national oil companies, the Company is able to generate higher margins on sales to these customers than on export sales and the Company considers these arrangements are essential to the business of the Group within the meaning of Section 417(5)(c) of the Companies Act 2006.

amendments to the articles of associationAny amendments to the articles of association of the Company may be made by special resolution of the shareholders.

significant agreementsThe Companies Act 2006 requires disclosure of significant agreements that take effect, alter or terminate on a change of control of the Company. These are as set out below:

Convertible bond issueIn February 2011, the Group issued US$500 million 4.25% guaranteed senior unsecured convertible bonds due 2016, described in more detail in ‘Post balance sheet events’ below. The bond issue was subsequently increased to US$550 million due to the exercise of an over-allotment option of US$50 million.

Pursuant to the final terms attaching to the bonds, the bondholders will have the right to require the Group to redeem the bonds at a price equal to the principal amount, together with accrued and unpaid interest to the date of redemption or if there is a change of control of the Company in which any person or persons, acting together (other than Essar Global or any person(s) controlled by or acting together with Essar Global) acquires or becomes entitled to control more than 50% of the voting rights of the Company.

Relationship agreementThe Relationship agreement between Essar Global and the Company (described in detail on page 50) will terminate should Essar Global, together with its associates (as defined in the Relationship Agreement), cease to have an aggregate interest in 30% or more of the issued share capital of the Company.

otherThe Executive Director’s contracts of employment do not contain any provision for compensation to be provided on loss of office in event of a takeover bid.

employeesInformation relating to employees is contained in the Corporate Responsibility report on page 36.

Creditor payment policyIt is the Group’s payment policy, in respect of all suppliers, to settle agreed outstanding accounts in accordance with terms and conditions agreed with suppliers when placing orders and suppliers are made aware of these payment conditions. The Group’s trade creditors as a proportion of amounts invoiced by suppliers represented 62 days at 31 December 2010.

Post balance sheet eventsOn 18 January 2011, Essar Energy launched an offering of US$500 million of convertible bonds due 2016. The bonds were successfully priced with a coupon of 4.25% payable semi-annually in arrears and a conversion price set at a premium of 30% to the reference price of US$8.5277 (c.£5.37) per share. The offering size was subsequently increased to US$550 million due to the exercise of an over-allotment option of US$50 million. The convertible bonds were issued on 1 February 2011. Essar Global, the majority shareholder of Essar Energy, did not participate in the convertible bond transaction, but they did enter into an equity swap transaction with Standard Chartered Bank whereby EGL acquired an additional economic interest of US$144.75 million in Essar Energy’s ordinary shares. The swap will last for the life of the convertible bonds and may be settled by EGL receiving cash or, at EGL’s option, shares. The result of the equity swap transaction is to increase EGL’s economic interest in Essar Energy to 78.02% from 76.72% as at 31 December 2010.

Directors’ report continued

Essar Energy plc Annual report + accounts 2010 53C

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On 18 February 2011, Essar Energy announced that it had entered into an exclusivity agreement with Shell UK Limited and made an offer to purchase the oil refinery and other associated assets at Stanlow, near Ellesmere Port, Cheshire for a cash consideration of US$350 million. There will also be a separate payment for the crude oil, refined products and certain other inventory on the Stanlow refinery site, to be valued on completion of the acquisition based on prevailing market prices (estimated to be in the region of US$780 million). The acquisition of the high complexity Stanlow refinery, which is the second largest refinery in the UK, will give Essar Energy direct access to the UK market, is aligned with the Company’s strategy to provide options for the export of products from the Vadinar refinery in India, and is being acquired at a competitive price when compared to other recent comparable refinery transactions. The acquisition will be conditional, amongst other items, on the approval of Essar Energy’s shareholders at a general meeting. The acquisition is expected to be completed in the second half of 2011.

market value of land and buildingsLand is carried at cost within the financial statements. It is not practical to estimate the market value of land at each balance sheet date.

Political and charitable donationsThe Company has made no charitable or political donations in 2010 (including in India). Further information in respect of the Group’s community initiatives are set out in the Corporate Responsibility report on pages 32 to 37.

financial instrumentsDetails of the Company’s use of financial instruments, together with objectives and policies on financial risk including information on the Company’s exposures to foreign currency, credit, commodity, price, liquidity and interest rate risks can be found in Notes 23 and 24 to the financial statements.

Going concernDisclosures in respect of going concern are provided in the Financial review on page 43.

audit informationEach of the Directors at the date of the approval of this report confirms that:

so far as the Director is aware, there is no relevant audit ¸¸

information which the Company’s auditors are unaware; andthe Director has taken all the steps that he ought to have ¸¸

taken as a Director to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of the information.

The confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

auditorsThe Company’s auditors, Deloitte LLP, have indicated their willingness to continue in office and resolutions seeking to reappoint them as the Company’s auditors and to authorise the Directors to determine their remuneration will be proposed at the forthcoming AGM.

annual General meetingThe Company’s AGM will be held at 11 am on Wednesday 18 May 2011 at Deutsche Bank Auditorium, Winchester House, 1 Great Winchester Street, London EC2N 2DB. Details of the meeting and the resolutions to be proposed are set out in a separate Notice of Meeting which accompanies this annual report.

By order of the Board

Christian angseesing for and on behalf ofExecutive Services Limited MauritiusCompany Secretary

18 March 2011


introductionThe Company is committed to maintaining the highest standards of corporate governance both in respect of its management of the Group and its businesses and its accountability to its shareholders as a whole. This section of the annual report sets out the corporate governance framework for the Company and how it has evolved since the Company listed its shares on the Main Market of the LSE on 7 May 2010.

The Combined Code on Corporate Governance, which was issued in its amended form in June 2008 by the Financial Reporting Council, sets out the standards of good practice in relation to corporate governance in the form of a set of principles and guidance. In relation to section 1 of the Combined Code, the Financial Services Authority requires listed companies to disclose how they have applied these principles and to explain whether they have complied with the provisions of the Combined Code throughout the financial year.

Since Listing, the Company has complied with the Combined Code in all respects, save for the following: (i) Code Provision A.1.3. the Non-Executive Directors have

not yet met to appraise the Chairman’s performance; (ii) Code Provision A.2.2. the Chairman did not meet the

independence criteria set out in the Combined Code on his appointment, due to his interest in the Company; and

(iii) Code Provision A. 6. 1. a Board evaluation has not yet been undertaken.

In relation to (i) and (iii) above, as the Directors were appointed in April 2010 just prior to Listing, the Board is of the view that a meaningful evaluation of the Board can only take place once the Board has worked together for a full year. The evaluation policy will therefore be developed and implemented in 2011. Likewise, the Non-Executive Directors will meet to appraise the Chairman in 2011.

In relation to (ii) above, The Chairman was not independent at the time of his appointment and remains non-independent as he is also Vice Chairman of the Essar Group and is indirectly a majority shareholder in the Company. In view of the Chairman’s position as one of the founders of the Essar Group and his extensive involvement with Essar Oil and Essar Power over a period of many years, the Board considers that his knowledge of Essar and role in building it into one of India’s premier business groups provides significant benefits to Essar Energy, outweighing any potential conflicts. The Chairman has made a major contribution to the Group’s growth and success and the Board is unanimously of the opinion that his continued involvement is crucially important to the ongoing success of the Company.

the role and structure of the Board The Board consists of seven Directors, made up of the Chairman, Vice Chairman and Chief Executive and four independent Non-Executive Directors. Biographies of all the Board members appear on pages 8 to 10 of this annual report.

In April 2010, the Chairman, Mr Ravi Ruia; the Vice Chairman, Mr Prashant Ruia; the Chief Executive, Mr Naresh Nayyar and the four independent Non-Executive Directors; Mr Philip Aiken, Mr Sattar Hajee Abdoula, Mr Subhash Lallah and Mr Simon Murray, were appointed to the Board.

The Board is collectively responsible for the long term success of the Company and has ultimate responsibility for the management, direction and performance of the Group and its businesses. The Board is required to exercise objective judgement on all corporate matters and is accountable to shareholders for the proper conduct of the business.

The day to day management of the Company is delegated to and run by the Chief Executive and the Management Committee, the role of which is described below. The Board has also delegated authority for specific matters to the Nominations and Governance Committee, the Remuneration Committee, the Audit Committee and the Health and Safety and Environment Committee. Further information on each of these committees is set out on pages 56 to 58 of this Corporate Governance report.

There are, however, a number of matters which are reserved for the Board’s decision. These are set out in a formal schedule, approved by the Board and include:

the overall Group strategy and long range plans;¸¸

stewardship of business performance;¸¸

devising and reviewing the corporate governance structure ¸¸

of the Group; approval of all new capital projects, any acquisitions ¸¸

including joint ventures or divestments;approval of the annual budget, including maintenance and ¸¸

project capital expenditure, and the operating plan;delegated levels of authority and the annual and half-year ¸¸

financial results and shareholder communications;the system of internal control and risk management;¸¸

the Group management structure;¸¸

recommending dividend policy for shareholder approval;¸¸

appointment of external auditors;¸¸

entering into related party transactions;¸¸

entering into new committed financial facilities;¸¸

approving the Financial and Treasury Risks Policy; and¸¸

appointments to the Board.¸¸

subsidiary Board structureEssar Energy operates its oil and gas business in India through Essar Oil Limited. Essar Oil has 10.04% of its shares listed on the Bombay Stock Exchange and the National Stock Exchange of India. Essar Oil has its own board along with a management committee and audit committee that undertakes all the subsidiary’s corporate governance requirements and complies with the Indian listing requirements. Similarly, Essar Power, which operates Essar Energy’s power business in India, also has its own Board along with a management committee and audit committee. The chief executives of these businesses are members of the Essar Energy Management Committee.

the management CommitteeThe Management Committee focuses on monitoring implementation of the Company’s strategy, progress against agreed plans and operational matters to ensure the Board’s strategic directions are implemented and to make recommendations to the Board. The Management Committee membership comprises the Vice Chairman, Mr Prashant Ruia, as Chairman of the Committee, the Chief Executive of the Company, Mr Naresh Nayyar, the Chief Executives of the business groups, the Chief Financial Officer, Mr P Sampath and the Director of Investor Relations and Communications, Mr Mark Lidiard.

In September 2010, Mr P Sampath was appointed Chief Financial Officer for Essar Energy following the resignation of Mr Gerry Bacon.

Corporate governance report


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The Management Committee meets on a monthly basis. Management Committee members generally receive papers a week in advance of the meeting. Agenda items for each meeting include operations, financial performance and management accounts, an update on projects, use of funds and funding requirements and legal and corporate governance. The agenda will also include, at least twice a year, an item to monitor and review the effectiveness of the Group’s risk management policy.

Board balance and independenceMr Ravi Ruia is the Chairman of the Company and is also Vice Chairman of the Essar Group, the Company’s controlling shareholder and a related party for the purposes of the Listing Rules of the UK Listing Authority. Mr Prashant Ruia is Vice Chairman of the Company and Chief Executive of the Essar Group, Mr Naresh Nayyar is Chief Executive of the Company.

The majority of the Non-Executive Directors are determined by the Board to be independent, in compliance with the Combined Code recommendation that at least half the board of a UK listed company should comprise independent Non-Executive Directors. Their independence provides a strong foundation for good corporate governance.

independent non independent

Mr Philip Aiken Mr Ravi Ruia

Mr Sattar Hajee Abdoula Mr Prashant Ruia

Mr Simon Murray Mr Naresh Nayyar

Mr Subhash Lallah

senior independent DirectorMr Simon Murray has been appointed by the Board as the Senior independent Non-Executive Director and is available to address shareholders’ concerns that have not been resolved through the normal channels of communication with the Chairman, Vice Chairman, Chief Executive or Chief Financial Officer, or in cases when such communications would be inappropriate.

Chairman, vice Chairman and Chief executiveThere is a clear division between the roles of Chairman, Vice Chairman and Chief Executive and a written statement of their responsibilities has been approved by the Board. The Chairman is responsible for the operation, leadership and governance of the Board and for ensuring its effectiveness and setting its agenda. The Vice Chairman is responsible for leading, developing and managing the executive team and the Chief Executive is responsible for guiding the implementation of Board strategy and policy with respect to the Group’s business, with the assistance of the Management Committee.

Board processThe Board intends to hold at least four scheduled Board meetings a year. The Board also meets on an ad hoc basis in response to business needs. All the meetings of the Board and Board committees were held at the Essar Energy Head Office in Mauritius. There have been three scheduled Board meetings since Listing and a table of attendance of members of the Board and Board Committees at meetings held since the Listing to 31 December 2010 is set out below:

Board meetingsRemuneration

Committee meetings

audit Committee

meetings

Health, safety and environment

Committee meetingsscheduled ad Hoc

1

Mr Ravi Ruia 2/3 0/3

Mr Prashant Ruia 3/3 0/3

Mr Naresh Nayyar 3/3 0/3 1/1

Mr Philip Aiken 3/3 1/3 2/2 1/1

Mr Sattar Hajee Abdoula 2/3 2/3 3/4

Mr Simon Murray 2/3 0/3 2/2 3/4

Mr Subhash Lallah 2/3 3/3 2/2 4/4

1 Board meetings convened at relatively short notice to deal with ad hoc commercial matters. Representation at such meetings reflects the short notice period given. Board members who were unable to attend received the briefing papers in advance and had the opportunity to provide their input prior to the meeting. Any such comments received were duly noted at the relevant meeting.


The Directors receive appropriate briefing papers on substantive items, which are, in general, circulated at least a week before the relevant Board meeting to give the Directors adequate time to prepare for the meeting and to enable any Director who is unable to attend the meeting to have an opportunity to review the matters to be discussed and, if necessary, to provide comments to the Chairman in advance of the meeting. The Directors also receive regular updates on financial information between Board meetings. All Directors have the right to have their concerns about the running of the Company, or a proposed action which cannot be resolved, recorded in the minutes.

Board developmentAll new Directors receive a comprehensive induction upon appointment to the Board. Programmes of continuing professional development are arranged as required, taking into account the individual qualifications and experience of the Directors. The Chairman is responsible for ensuring induction and training programmes are provided and the Company Secretary is tasked with organising such programmes. Individual Directors, with the support of the Company Secretary, are also expected to take responsibility for identifying their own training needs and to ensure that they are adequately informed about the Group and their responsibilities as a Director.

All of the Directors received a comprehensive briefing on their duties and responsibilities as Directors of a UK Listed company by the Company’s advisors as part of the Listing process. Further briefings will take place in 2011 to ensure that the Directors are kept informed of relevant developments and that updates on the changes and developments to the business are provided at Board meetings as appropriate. A number of the Directors attended site visits prior to Listing and further site visits have taken place in 2011.

AdviceAll Directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. Both appointment and removal of the Company Secretary are a matter for the Board as a whole. All Directors also have access to the Group’s professional advisors whom they can consult at the Company’s expense should they consider this necessary in order to better discharge their responsibilities.

Conflicts of interestThe Board is required to disclose any actual or potential conflicts of interest. The Directors declared any conflicts of interest at the time of Listing and a declaration of interests forms a standard item on the agenda for each Board meeting. A schedule of conflicts or potential conflicts for each Director is reviewed at least annually. In accordance with the Company’s Articles of Association, the Board is permitted to authorise any matter proposed to it which relates to a situation in which a Director has, or can have, an interest which conflicts, or possibly may conflict, with the interests of the Company. The Board may (whether at the time of the authorisation or subsequently) make any such authorisation subject to any limits or conditions it expressly imposes but such authorisation is otherwise given to the fullest extent permitted. The Board may vary or terminate any such authorisation at any time.

Re-election of Directors at the AGMThe articles of association of the Company require that all Directors appointed by the Board submit themselves for election by shareholders at the first AGM following their appointment. As the forthcoming AGM will be the first since Listing, all the Directors will submit themselves for election by shareholders. This is also in compliance with the provisions of the new UK Corporate Governance Code, which will apply to the Company for the financial year ending 31 December 2011 and requires that all Directors be re-elected on an annual basis. Going forward it is therefore intended that all Directors will stand for annual re-election at future AGMs.

The Directors being proposed for election have only been in the post since shortly before Listing and the Board remains satisfied that each Director proposed for election continues to be fully competent to carry out his responsibilities as a member of the Board.

The Board committeesTerms of reference for each of the following committees are available on the Company’s website, www.essarenergy.com.

Audit CommitteeThe Audit Committee is chaired by Mr Sattar Hajee Abdoula, an independent Non-Executive Director, who has over 30 years experience in accounting, audit and consultancy. The other members of the Committee are Mr Simon Murray and Mr Subhash Lallah. All of the members are, therefore, independent Non-Executive Directors.

Under its terms of reference, the Audit Committee is required to meet at least three times a year or more frequently as circumstances require. Since the Listing the Audit Committee has met four times. The Audit Committee reports on its activities to the Board, immediately following its meetings.

Since Listing the Audit Committee has carried out various activities in accordance with the responsibilities set out in its terms of reference including the activities described below.

The Audit Committee has reviewed the 2010 annual report including the preliminary results before recommending them to the Board. In doing so the Committee reviewed and discussed the preliminary results and annual financial statements with management and the external auditors focusing particularly on:

the quality and acceptability of the accounting policies ¸¸

and practices and financial reporting disclosures and changes thereto;areas involving significant judgement, estimation or ¸¸

uncertainty;the detecting of material misstatements by the auditors that ¸¸

individually or in aggregate have not been corrected and management’s explanations as to why adjustments have not been made;the basis for the going concern assumption; and¸¸

compliance with financial reporting standards and relevant ¸¸

financial and governance requirements.

Corporate governance report continued



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The Audit Committee oversees the relationship with the external auditors, Deloitte LLP, who were appointed auditors at the time of the IPO. In managing this relationship a policy on the engagement of the external auditors for non-audit services has been developed and implemented. When considering the reappointment of the Company’s external auditors before making a recommendation to the Board to be put to shareholders the Committee reviewed and monitored the external auditor’s independence and objectivity and the effectiveness of the audit process. Accordingly, the Committee recommends the reappointment of Deloitte LLP at the forthcoming AGM.

The Audit Committee is responsible for monitoring and reviewing the effectiveness of the internal audit function or considering the need for an internal audit function. The Audit Committee has outsourced the internal audit function by appointing Ernst & Young Pvt. Limited to undertake the role of internal auditor to the Group with effect from 1 November 2010. Ernst & Young have put forward, and the Audit Committee has approved, a risk-based internal audit plan based on the business process value chain, the risks identified within the financial reporting process at the Listing, past internal audit activity carried out by the internal audit function of Essar Global and the views of the management.

Internal audit is an independent review and support function whose primary role is to provide an objective evaluation of operations, information and control systems that the Company has put in place, primarily to the Audit Committee but also as a service to management. It provides analysis, recommendations, counsel, and information concerning the activities examined and provides assurance as well as guidance on the development of effective and efficient controls with respect to process integrity, accuracy in reporting and compliance with policies and regulation. As part of this service to management the internal audit meets quarterly with the management as part of a Management Audit Committee held prior to the Audit Committee meetings. This Committee is chaired by the Chief Executive and attended by the Chief Financial Officers of the businesses. The meeting provides an opportunity for the internal audit to report on their activities directly to the management to ensure actions are taking place and highlight any remedial actions necessary.

Remuneration CommitteeThe members of the Remuneration Committee are Mr Subhash Lallah (Chairman of the Committee), Mr Simon Murray and Mr Philip Aiken. All of the members are independent Non-Executive Directors.

The role of the Remuneration Committee is to determine the framework or broad policy for the remuneration of Chairman, Vice Chairman, Chief Executive, the Chief Financial Officer the Company Secretary and any other members of the Senior Management as the Board may determine from time to time.

Under its terms of reference, the Remuneration Committee is required to meet at least twice a year or more frequently as circumstances require. Since Listing, the Remuneration Committee has met twice. The Remuneration Committee

reports on its activities to the Board, immediately following its meetings.

The Directors’ Remuneration report is set out on pages 61 to 64.

nominations and Governance CommitteeThe members of the Nominations and Governance Committee are Mr Simon Murray (Chairman of the Committee), Mr Prashant Ruia and Mr Subhash Lallah. The majority of the members are, therefore, independent Non-Executive Directors.

The role of the Nominations and Governance Committee is to identify and nominate, for approval of the Board, candidates to fill Board vacancies as and when they arise as well as putting in place plans for succession for Directors and senior executives, in particular with respect to the Chairman, Vice Chairman and Chief Executive.

Under its terms of reference, the Nominations and Governance Committee is also responsible for reviewing the structure, size and composition, including the skills, knowledge and experience, of the Board and making recommendations to the Board about adjustments. When making an appointment, the Committee is required by its terms of reference to evaluate the balance of skills, knowledge and experience on the Board and consider candidates on merit and against objective criteria, taking care that appointees have enough time available to devote to the position.

Under its terms of reference, the Nominations and Governance Committee is required to meet at least twice a year and at such other times as the Chairman of the Committee shall require.

Given that the Company only listed in May 2010, it has not considered it necessary for the Committee to meet during the last financial year. The Committee met on 3 March 2011 and the discussions included consideration of the forward looking agenda which will include a discussion on succession planning, a review of the size, structure and composition of the Board and the independence of the Non-Executive Directors.

Health, safety and environment CommitteeThe members of the Health, Safety and Environment Committee are independent Non-Executive Director Mr Philip Aiken (Chairman of the Committee), Mr Naresh Nayyar and Mr KVB Reddy, an Executive Director of the Company’s subsidiary, Essar Power.

The Health, Safety and Environment Committee assists the Board and the Management Committee in obtaining assurance that appropriate systems are in place to deal with the management of safety, health and environmental risks. The Health, Safety and Environment Committee will meet at least twice a year and has met once since Listing. In general the Health, Safety and Environment Committee meetings will be held in India with each meeting including a site visit.

For further information on health, safety and environment, please refer to the Corporate Responsibility report on pages 32 and 37 of this annual report.


internal ControlThe Board has overall responsibility for the Group’s system of internal control and risk management and has delegated to the Audit Committee its responsibility for reviewing the effectiveness of these controls. The system of internal control is designed to manage rather than eliminate risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

As part of the Listing process undertaken by the Group a comprehensive review was undertaken of the control environment. That review confirmed that the controls in operation prior to the formation of the Group at the operating companies were appropriate and that controls had been implemented at the Group level to provide a satisfactory control environment. During the year these controls have been refined and improved. The Group Internal Audit function has undertaken an exercise at the year end to confirm design and operating effectiveness of the controls.

Control structureThe Board sets the policy on internal control that is implemented by Management. This is achieved through a clearly defined operating structure with lines of responsibility and delegated authority.

The policy set by the Board is formally documented in the Group Governance and Administration Manual (the ‘Manual’) which clearly defines the limits of delegated authority and provides a framework for management to deal with areas of significant business risk.

The Manual confirms a Code of Conduct that applies to all areas of the business and covers a requirement for all employees to comply with all applicable laws and regulations in the territories in which the Group operates. At operational level this Code of Conduct is covered through the detailed human resource policies that are available on the Group’s intranet.

The Board also approves individual policies covering areas that are identified as key for the Board to monitor. For example, a policy on the process for entering into and reporting related party transactions has been approved and circulated throughout the Group with individual briefings to the key individuals responsible for managing the process.

These policies and procedures are reviewed and, where necessary, updated at Management Committee meetings.

Control environmentThe Group’s operating procedures include appropriate systems for reporting information to the Directors. These procedures are business dependent but all significant operational businesses use SAP general ledger systems with automated controls and reconciliation processes.

Budgets are prepared by subsidiary management and subject to review by the Chief Executive and then the Directors. The approved budgets are then used as the basis for controlling expenditure, with approval levels varying based on whether an item is within or exceeds budget.

The Management Committee and the Board review monthly management reports on the financial results and key operating statistics, together with a brief written explanation of significant variances or operational matters. The management reports are presented by the respective accountable individuals who provide further explanations as required.

The individual businesses monitor the progress of the expansion projects through regular project management review meetings to review progress and escalate issues to the Chief Executive, with any major issues reported to the Board.

Emphasis is placed on the quality and abilities of the Group’s employees, with structured evaluation processes and access to a variety of online, internally and externally provided learning and development tools. This is provided through a shared service agreement with the Essar Global Human Resources function that was agreed as part of the Listing process and enabled the seamless transition of employee development. The Essar Global Human Resources President is invited to attend Remuneration Committee meetings.

The acquisition of any business requires a rigorous analysis of the financial implications of the acquisition and key performance figures. A sensitivity analysis takes place of the key assumptions made in the analysis with formal presentations to the Board.

The Management Committee and Board have been provided with a report detailing any significant legal actions involving Group companies, which provides a background to the case and its current status within the appropriate legal system.

monitoring and review activitiesA number of processes have been instituted for monitoring the system of internal control and reporting any significant control failings or weaknesses together with details of corrective action.



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A formal annual confirmation has been introduced with the directors of each business segment certifying the operation of their control systems and highlighting any weaknesses.

During the year a Group internal audit function was appointed, provided through an outsourced relationship with Ernst & Young Pvt. Limited. This internal audit function reports directly to the Audit Committee and has prepared a risk based audit plan agreed with the Audit Committee and undertaken a number of audits based on that plan. The Group has also formed a Management Audit committee chaired by the Chief Executive that reviews the results of internal audit reports to ensure any points raised are properly addressed.

A comprehensive and detailed risk register was established as part of the Listing process and has been updated and refreshed at the half year and year end to ensure all significant risks are appropriately managed. Significant risks and their mitigating actions along with any remedial actions are monitored by the Management Committee and subsequently reviewed by the Audit Committee and the Board.

Reports from the external auditors, Deloitte LLP, on certain internal controls and relevant financial reporting matters, are presented to the Audit Committee and management.

A hotline has been established providing arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. Staff may raise concerns in either English or the local language using a toll-free hotline phone number or by sending an email or letter to addresses especially created for the purpose. This policy has been disseminated across the Group.

review of effectivenessThe Directors, the Chief Executive and the Chief Financial Officer consider that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. The Group’s Management is required to apply judgement in evaluating the risks facing the Group in achieving its objectives, in determining the risks that are considered acceptable to bear, in assessing the likelihood of the risks concerned materialising, in identifying the Company’s ability to reduce the incidence and impact on the business of risks that do materialise and in ensuring the costs of operating particular controls are proportionate to the benefit.

In reviewing the effectiveness of the Group’s system of internal controls the Board has, through the Management Committee and the Audit Committee, taken account of the matters

summarised above. The Board considers that these matters provide the key building blocks for an assessment of the control environment and that the measures that have been implemented both before and after the Listing are appropriate to the Group. The Board is committed to building on these measures through the execution of the internal audit programme and the continued review by the Management and Audit Committees.

relations with investors The Company is committed to the promotion of investor confidence by ensuring that trade in its securities takes place in an efficient, competitive and informed market. The Company recognises the importance of forthright communication as key to building shareholder value and that, in order to prosper and achieve growth, it must (among other things) earn the trust of employees, customers, suppliers, communities and security holders by communicating openly and consistently delivering on its commitments. In doing so, the Company will comply with the continuous disclosure obligations relevant to a listed company.

Since Listing, the Company has put in place a comprehensive programme of investor communications. This includes:

ensuring that all material information on the Company is ¸¸

broadly disseminated to investors, analysts and the media and that this information is available on our website at www.essarenergy.com. Distribution of information is via the UK’s regulatory news service and via email to our extensive contact database;increasing the number of analysts providing investment ¸¸

research on Essar Energy. At the time of Listing, four broking firms provided research on the Company. This number has now increased to eight, with more brokers undertaking analysis to initiate coverage;a programme of direct contact with major investors and ¸¸

potential investors including attendance at investor conferences and visits by senior management to major financial centres. Since Listing, cities visited include; London, Edinburgh, New York, Boston, Tokyo, Hong Kong, Singapore, Paris and Frankfurt. We intend to continue with this programme during 2011; andensuring that relevant and up to date information on ¸¸

the Company and its operations is available on the Company’s website.

The Company produces an Annual Report which is published for all investors and the Company’s website contains up to date information on the business.




The Company has taken advantage of the provisions of the Companies Act 2006 which allow the Company’s website to be used as the primary means of communicating with those shareholders who have not specifically requested hard copy documentation. The Shareholder Information section of this report contains further details on electronic communications with shareholders.

The Board regards the forthcoming AGM as a valuable opportunity to communicate with the Company’s investors.

The Company’s Director of Investor Relations and Communications, Mr Mark Lidiard, is based in the London office and is contactable on +44(0) 20 7408 7660 or [email protected]

The Annual General Meeting The Company’s first AGM will be held on Wednesday 18 May 2011. Separate resolutions on substantially separate issues will be put to the AGM and proxy forms will allow shareholders to

vote for, against or withhold a vote on a resolution. Details of the proxy votes counted will be announced at the meeting and on the Company’s website after the meeting. The Chairman of the Board and the Chairmen of each of the Board committees will be available to answer questions put forward to them by shareholders of the Company. The 2010 Annual Report and the Notice of the AGM will be sent to shareholders at least 20 working days prior to the date of the meeting.

Simon MurraySenior Independent Non-Executive Director on behalf of the Board

18 March 2011

mailto:[email protected]


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Remuneration report

I am pleased to present the first Remuneration report of Essar Energy. The Remuneration Committee’s key objective is to determine a remuneration package that reflects our performance driven culture and rewards our people appropriately. It takes into account the geographical locations and markets of our operations and the need to attract, motivate and retain our people.

In 2010, the Remuneration Committee undertook the following key activities:

agreement of the initial remuneration philosophy for the ¸¸

Board and key management personnel;confirmation of the remuneration package for the Board and ¸¸

key management personnel for the Company’s first year of operations, following independent advice; andapproval of the Employee Stock Option Plan and granting ¸¸

options under that scheme.

Going forward, we will review our remuneration arrangements to ensure that they encourage enhanced performance in a fair and responsible manner and reward contributions to the continuing success of the Group.

subhash lallahChairman of the Remuneration Committee

18 March 2011

This report has been prepared in accordance with Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. It also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles of good governance as set out in the Combined Code relating to Directors’ remuneration. Further information regarding the Company’s Board and its committees can be found in the Corporate Governance report.

The Companies Act 2006 requires the auditors to report to the Company’s members on certain parts of this report and to state whether in their opinion those parts have been properly prepared in accordance with the Companies Act 2006. The report has therefore been divided into separate sections for unaudited and audited information.

(unaudited information)Remuneration CommitteeThe Remuneration Committee is chaired by Mr Subhash Lallah, and its other members are Mr Simon Murray and Mr Philip Aiken, all of whom are considered by the Board to be independent Non-Executive Directors in accordance with the recommendation of the Combined Code. Other members of the Board or those with responsibilities over Human Resources matters may be invited to attend meetings except when their own remuneration is discussed. The details of the frequency and attendance of Remuneration Committee meetings are set out in the Corporate Governance report.

Responsibilities The Remuneration Committee recommends the policy for the Executive Director’s remuneration and determines the levels of remuneration for the Executive Director, the Chairman and the Vice Chairman. Additionally, the Remuneration Committee recommends and monitors the level and structure of remuneration for members of key management personnel.

The Remuneration Committee also reviews and approves the operation of share and share option schemes and the granting of share awards. It also reviews and advises the Board on any major changes in wider employee benefits.

The remuneration of Non-Executive Directors is determined by the Board as a whole. No Director participates in the determination of his own remuneration.

The terms of reference for the Committee are reviewed periodically and are available on the Company’s website.

Deloitte LLP was independently retained by the Committee as advisors and have provided information on relevant current market practice and developments in best practice guidance.

Deloitte LLP also provided audit and other services compatible with their roles as auditors to the Group, as set out in Note 8 to the financial statements and described more fully in the Corporate Governance report.

Remuneration philosophyExecutive remunerationThe Company’s policy is to ensure that the Board and key management personnel are fairly rewarded with regard to responsibilities undertaken taking into account appropriate market practice.

Corporate and individual performance is taken into account in setting the pay level for the Chief Executive as the sole Executive Director of the Company, and will be reviewed on an annual basis to ensure it remains appropriate. In addition, our policy is that base pay should represent 50-75% of total remuneration and be incremented annually based on performance, inflation and market rates.

Annual Performance Linked Incentive planThe Remuneration Committee has also put in place an Annual Performance Linked Incentive scheme where variable remuneration may be paid on fulfilment of a range of individual and corporate performance targets up to a maximum of 41.7% of base salary. The performance targets are grouped within four key performance areas:

managing the financial results and achievement of budgeted ¸¸

financial targets;driving innovative manufacturing operations and marketing ¸¸

excellence;the timely completion of projects and the integration of new ¸¸

assets; and providing leadership, governance and organisational ¸¸

development.

Within each area a number of indicators and metrics have been identified that are taken into account by the Remuneration Committee when determining the amount of Annual Performance Linked Incentive to be awarded.


Essar

Total Shareholder Return

FTSE100 80

90

100

110

120

130

140

150

160

May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10

employee stock option PlanThe Company established its first share scheme in 2010 with the introduction of the ESOP for the Chief Executive and certain other key management personnel. The scheme entitles the holder to acquire up to a maximum number of ordinary shares of the Company at a market value exercise price, provided certain performance criteria are met. The ESOP has a performance period of three years where the following percentage of options will vest depending on the growth in Earnings per Share (‘EPS’):

ePs Growth

Percentage of option

that vests

5% per annum 30%

10% per annum 100%

Between an EPS growth per annum of 5% and 10% the percentage of option that vests is calculated on a straight line basis. None of the option vests below 5% per annum EPS growth.

Components of remuneration

Main Features

Base salary¸ Reviewed on an annual basis¸ Review takes into account the individual’s skills and experience in

the context of the relevant market

annual Performance linked incentive¸ Annual incentive ¸ Based on a range of financial and non-financial, corporate and

individual performance criteria¸ Target 33.3% of Base Salary up to a maximum of 41.7% for stretch

performance

esoP¸ Annual grants¸ Market value options¸ Subject to 3 years growth in EPS performance condition¸ Grant values up to 100% of Base Salary for Executive Directors

(with a maximum of 300% in exceptional circumstances)

Pension alternative¸ Cash supplement in lieu of pension¸ 10% of Base Salary

non-executive remunerationThe remuneration of the Chairman, Vice Chairman and Non-Executive Directors was determined by the Board prior to the IPO in accordance with the Company’s policy. Deloitte LLP provided the Company with relevant market data.

The Chairman, Vice Chairman and Non-Executive Directors are not entitled to participate in the Company’s bonus or share plans.

Directors’ interestsThe Directors’ interests are set out in the Directors’ report.

Performance graphThe Remuneration Committee has elected to compare the total shareholder return on the Company’s ordinary shares against the FTSE 100 Index principally because this is the index of which the Company is a constituent member. The values indicated in the graph show the share price growth from a £100 hypothetical holding of ordinary shares in the Company and in the index, from IPO date to 31 December 2010 and have been calculated using daily closing values.

Remuneration report continued


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(audited information)Directors’ remuneration package and service contract The following table summarises amounts paid to Directors in 2010 from their dates of appointment to 31 December 2010. All amounts are in pound sterling. Information regarding the various elements of the Directors’ annual remuneration package, service contract and terms is further discussed below.

nameBase salary

and fees Bonus total

ChairmanMr Ravi Ruia £225,000 – £225,000

vice ChairmanMr Prashant Ruia £131,250 – £131,250

Chief executive Mr Naresh Nayyar1 £689,713 £104,450 £794,163

non-executive DirectorMr Philip Aiken £63,750 – £63,750

Mr Sattar Hajee Abdoula £63,750 – £63,750

Mr Simon Murray £71,250 – £71,250

Mr Subhash Lallah £71,250 – £71,250

total £1,315,963 £104,450 £1,420,413

1 Naresh Nayyar remuneration includes fixed pay of £126,345 and a bonus of £57,502 for his services as the Managing Director of Essar Oil Limited in India. Amounts paid in India have been converted at a rate of £1= INR 69.78.

Chairman, vice Chairman and non-executive DirectorsThe appointment of the Chairman, Vice Chairman and each of the Non-Executive Directors commenced on 6 April 2010 and will continue until the Company’s first AGM. The details of the Board’s re-election are provided in the Directors’ report. The appointment may also be terminated at any time by the Company in accordance with its Articles of Association or the Companies Act 2006. Upon termination, none of the Chairman, the Vice Chairman or any of the Non-Executive Directors is entitled to any damages for loss of office and no fee shall be payable in respect of any unexpired portion of the term of the appointment.

The letters of appointment are available for inspection at the Company’s registered office during normal business hours and at the AGM (for 15 minutes prior to and during the meeting).

The Chairman and the Vice Chairman are entitled to an annual fee of £300,000 and £175,000, respectively, for their services. The Non-Executive Directors are each entitled to an annual fee of £60,000 together with an additional fee of £15,000 per annum for chairing a Board Committee or alternatively £10,000 per annum for serving on a Board Committee.

The Chairman and the Vice Chairman and Non-Executive Directors do not receive any additional payments from subsidiaries of the Company other than those noted above.

Chief executive Naresh Nayyar is entitled to a salary of £682,870 per annum under his service agreement with Essar Energy Services (Mauritius) Limited. He is entitled to a cash payment equal to 10% of his basic salary to provide for long term financial planning into retirement and to provide for any dependants in the event of his death, and private medical insurance.

He is eligible to participate in an Annual Performance Linked Incentive scheme which provides a payment of up to £284,530 (at stretch level) subject to the achievement of certain performance targets relating to corporate and personal performance (with £227,624 for achieving target performance). No payments have been made under the Annual Performance Linked Incentive scheme in 2010, as the Company has not yet completed its first 12 months of operations. In accordance with employment laws in Mauritius, Naresh Nayyar has received a bonus of £46,948 equivalent to one month of his base salary from Essar Energy Services (Mauritius) Limited during the year.

Mr Nayyar is also eligible to participate in the Essar Energy ESOP, for which he has been granted an option to acquire up to a maximum of 204,444 shares ordinary shares of 5 pence at an exercise price of 523 pence.

number of shares Date of grant

market value of shares on

grant

Date from which

exercisable Date of expiry

204,444 15/11/2010 523p 15/11/2013 15/11/2020


As indicated on IPO it was the Remuneration Committee’s intention to grant options to key executives under the ESOP shortly following IPO at around the Listing price of 420 pence. The Remuneration Committee was unable to make these option grants until 15 November 2010, but the market price of the Company’s shares rose strongly in the intervening period. In order to ensure the Chief Executive and key management personnel were not disadvantaged by the delay in granting options to them, the Remuneration Committee awarded each individual concerned an additional cash right. This right is exercisable in conjunction with or in place of the share option, depending on the share price at exercise. The salary multiple used in determining the number of shares under these options has been calculated by reference to the 420 pence listing price, not the share price shortly before the grant date.

The Remuneration Committee indicated on IPO that the grant of options to Mr Nayyar would be based on a value equal to 100% of his annual base pay under his service agreement with Essar Energy Services (Mauritius) Limited (£682,870). However, the Remuneration Committee considered his contribution in bringing the Company to Listing and determined that the award should be based on his total annual base pay under his service agreements with both Essar Energy Services (Mauritius) Limited and Essar Oil Limited.

Mr Nayyar’s service agreement is terminable by either party on service of six months prior written notice. The Company has the ability to terminate the agreement by the payment of a cash sum in lieu of notice equal to the salary and other contractual benefits, excluding bonus, payable for any unexpired portion of the notice period.

Remuneration report continued

The payment in lieu of notice shall be paid within one month of the date of termination of the Executive’s employment or in equal instalments from the date of termination of the Executive’s employment until the relevant period. The payout shall be paid net of tax and subject to such deductions as may be required by law. Mr Nayyar is subject to a confidentiality undertaking without limitation in time and to non-competition, non-solicitation, non-dealing and non-hiring restrictive covenants for a period of 12 months after the termination of his employment.

In addition to his duties as Chief Executive, Mr Nayyar has continued to undertake his role as Managing Director of Essar Oil. Under this service agreement he is entitled to fixed pay of Rs. 12,840,000 (approximately £184,000) per annum and is eligible to receive a payment of up to Rs. 4,012,000 (approximately £57,502) at 125% stretch level under the Annual Performance Linked Incentive Scheme subject to achievement of certain performance targets relating to corporate and personal performance. Essar Oil has also made payments to a provident pension fund of Rs. 433,350 (approximately £6,210) on behalf of Mr Nayyar in 2010. This remuneration is in addition to that paid to him under his service agreement with Essar Energy Services (Mauritius) Limited. In the event of termination of the service agreement with Essar Oil, which is terminable by either party on service of six months prior written notice, Mr Nayyar is entitled to six months’ remuneration.


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statement of Directors’ responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the Company financial statements under IFRS as adopted by the EU. Under Company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors:

properly select and apply accounting policies;¸¸

present information, including accounting policies, in a ¸¸

manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the ¸¸

specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; andmake an assessment of the Company’s ability to continue as ¸¸

a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

responsibility statement We confirm that to the best of our knowledge:

the financial statements, prepared in accordance with IFRS, ¸¸

give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; andthe management report (entitled ‘Business review’), which is ¸¸

incorporated into the Directors’ report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board


18 March 2011

The Directors are listed on pages 8 to 10 of this annual report.


We have audited the financial statements of Essar Energy for the year ended 31 December 2010 which comprise the Group income statement, the Group statement of comprehensive income, the Group and Company balance sheets, the Group and Company cash flow statements, the Group and Company statements of changes in equity and the related notes 1 to 40. The financial reporting framework that has been applied in their preparation is applicable law and IFRS as adopted by the European Union, and as regards to the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorAs explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statementsAn audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.

Opinion on financial statementsIn our opinion:

the financial statements give a true and fair view of the ¸¸

state of the Group’s and of the Company’s affairs as at 31 December 2010 and of the Group’s profit for the year then ended;the Group financial statements have been properly ¸¸

prepared in accordance with IFRSs as adopted by the European Union;the Company financial statements have been properly ¸¸

prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; andthe financial statements have been prepared in accordance ¸¸

with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006In our opinion:

the part of the Directors’ Remuneration report to be audited ¸¸

has been properly prepared in accordance with the Companies Act 2006; andthe information given in the Directors’ report for the financial ¸¸

year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exceptionWe have nothing to report in respect of the following:

Under the Companies Act 2006 we are required to report to you if, in our opinion:

adequate accounting records have not been kept by the ¸¸

Company, or returns adequate for our audit have not been received from branches not visited by us; orthe Company financial statements and the part of the ¸¸

Directors’ Remuneration report to be audited are not in agreement with the accounting records and returns; orcertain disclosures of Directors’ remuneration specified by ¸¸

law are not made; orwe have not received all the information and explanations ¸¸

we require for our audit.

Under the Listing Rules we are required to review:the Directors’ statement, contained within the Directors’ ¸¸

report and Financial review sections of the annual report, in relation to going concern; the part of the Corporate governance statement relating to ¸¸

the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; andcertain elements of the report to shareholders by the Board ¸¸

on Directors’ remuneration.

James Leigh(Senior statutory auditor)for and on behalf of Deloitte LLPChartered Accountants and Statutory AuditorsLondonUnited Kingdom

18 March 2011

Independent auditor’s report


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Note2010

$ million2009

$ million

Continuing operationsRevenue 4 10,005.6 7,023.8

Cost of sales 5 (9,288.2) (6,445.6)

Gross profit 717.4 578.2

Other operating income 4 34.0 17.5

Selling and distribution expenses (91.7) (76.7)

General and administration expenses (120.9) (105.4)

profit before net finance costs and other gains 538.8 413.6

Finance income 6 49.2 26.0

Finance costs 6 (336.6) (309.8)

Other gains 7 114.1 155.9

profit before tax 5 365.5 285.7

Tax 9 (117.2) (78.9)

profit after tax 248.3 206.8

Attributable to:

Owners of the Company 201.5 152.8

Non-controlling interest 46.8 54.0

Earnings per share (US cents per share) – Basic and diluted 10 17.1 17.0

Consolidated income statementFor the year ended 31 December 2010

Note2010

$ million2009

$ million

Profit for the year 248.3 206.8

Exchange difference arising on translation of foreign operations 88.9 83.9

(Losses)/gains on available for sale investments during the year 13 (2.3) 15.8

Reclassification adjustments for gains included in profit (11.4) –

Other comprehensive income 75.2 99.7

total comprehensive income for the year 323.5 306.5

Attributable to:

Owners of the Company 251.2 226.0


Consolidated statement of comprehensive incomeFor the year ended 31 December 2010


Note2010

$ million2009

$ million

non-current assetsGoodwill 12b 133.6 127.5

Other intangible assets 12a 56.1 56.6

Property, plant and equipment 11 8,411.8 5,453.9

Investments in joint controlled entities 26 32.3 29.0

Trade and other receivables 14b 424.7 194.4

Other financial assets 15b 51.9 18.5

Deferred tax assets 9 0.2 0.4

total non-current assets 9,110.6 5,880.3

Current assetsInventories 16 1,194.2 864.2

Trade and other receivables 14a 1,089.2 859.1

Available for sale investments 13 – 41.3

Other financial assets 15a 514.4 292.6

Derivative financial assets 20a 2.1 6.9

Cash and cash equivalents 17 563.7 71.4

total current assets 3,363.6 2,135.5

total assets 12,474.2 8,015.8

Current liabilitiesTrade and other payables 19a 1,980.2 2,512.1

Finance leases 27 10.8 10.4

Borrowings 18 750.0 918.9

Derivative financial liabilities 20b 31.0 12.3

total current liabilities 2,772.0 3,453.7

non-current liabilitiesTrade and other payables 19b 998.2 130.7

Finance leases 27 14.9 22.7

Borrowings 18 3,747.6 2,190.1

Deferred tax liabilities 9 299.4 179.8

total non-current liabilities 5,060.1 2,523.3

total liabilities 7,832.1 5,977.0

net assets 4,642.1 2,038.8

equityInvested capital 21 – 2,301.7

Share capital 22 99.0 –

Share premium 2,043.8 –

Currency translation reserve (26.1) (89.5)

General reserve 1,160.6 –

Fair value reserve – 13.7

Other reserve 1,436.3 –

Retained deficit (431.9) (543.4)

equity attributable to owners of the Company 4,281.7 1,682.5


total equity 4,642.1 2,038.8

The Financial statements were approved by the Board of Directors and authorised for issue on 18 March 2011. They were signed on its behalf by:


Consolidated balance sheetAs at 31 December 2010


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attributable to equity interest

invested capital

(note 21) $ million

share capital

(note 22) $ million

share premium $ million

currency translation

reserve $ million

General reserve

(note 36) $ million

fair value reserve

$ million

other reserves $ million

retained deficit

$ milliontotal

$ million

non-controlling

interest $ million

total equity

$ million

1 January 2010 2,301.7 – – (89.5) – 13.7 – (543.4) 1,682.5 356.3 2,038.8Capital contribution 625.7 – – – – – – – 625.7 – 625.7Issues of shares

to Parent (1,491.1) 76.5 1,414.6 – – – – – – – –Issues of shares

on IPO – 22.5 1,864.1 – – – – – 1,886.6 – 1,886.6Transfer (1,436.3) – (1,160.6) – 1,160.6 – 1,436.3 – – – –IPO related

expenses – – (74.3) – – – – – (74.3) – (74.3)Commitment to

acquire non-controlling stake – – – – – – – (99.0) (99.0) – (99.0)

Acquisition of non-controlling stake – – – – – – – 9.0 9.0 (68.2) (59.2)

Total comprehensive income/(loss) for the year – – – 63.4 – (13.7) – 201.5 251.2 72.3 323.5

31 December 2010 – 99.0 2,043.8 (26.1) 1,160.6 – 1,436.3 (431.9) 4,281.7 360.4 4,642.1

Attributable to equity interest

Invested capital

$ million

Share capital

$ million

Share premium $ million

Currency translation

reserve $ million

General reserve

$ million

Fair value reserve

$ million

Other reserves $ million

Retained deficit

$ millionTotal

$ million

Non-controlling

interest $ million

Total equity

$ million

1 January 2009 2,193.0 – – (147.9) – (1.1) – (624.9) 1,419.1 285.4 1,704.5

Capital contribution 108.7 – – – – – – – 108.7 – 108.7

Acquisition of non-controlling stake – – – – – – – (71.3) (71.3) (9.6) (80.9)

Total comprehensive income/(loss) for the year – – – 58.4 – 14.8 – 152.8 226.0 80.5 306.5

31 December 2009 2,301.7 – – (89.5) – 13.7 – (543.4) 1,682.5 356.3 2,038.8

consolidated statement of changes in equityFor the year ended 31 December 2010


2010 $ million

2009 $ million

Cash flow from operating activitiesprofit before tax 365.5 285.7

Adjustments to reconcile profit before tax to net cash generated from operating activities:Depreciation and amortisation 127.0 114.0

Unrealised loss on derivatives 28.9 7.9

Interest cost 249.0 212.2

(Loss)/gain on disposal of property, plant and equipment (0.3) 0.8

Surplus on acquisition of joint controlled entity – (19.1)

Share in profit of joint controlled entity (1.7) (0.7)

Inventory written down – 13.4

Foreign exchange gains (94.4) (136.1)

Profit on sale of investments (11.2) –

Gain on settlement of liabilities (10.1) –

Operating cash flow 652.7 478.1

Tax paid (10.4) (5.5)

Changes in assets and liabilities:

Increase in trade and other receivables (380.5) (102.0)

Increase in inventories (287.1) (359.9)

Increase in other financial assets (91.5) (62.9)

(Decrease)/increase in trade and other payables (158.2) 372.9

Increase/(decrease) in other liabilities and provisions 13.2 (37.7)

net cash (used in)/generated from operating activities (261.8) 283.0

Cash flow from investing activitiesAcquisition of subsidiaries (net of cash acquired) (31.2) –

Purchase of property, plant and equipment (2,496.5) (462.4)

Payment for exploration and evaluation assets (58.5) (19.9)

Proceeds on disposal of property, plant and equipment 0.5 1.5

Payment for purchase of intangible assets (1.2) (1.6)

Payment for purchase of investments – (28.8)

Investments in joint controlled entities (2.9) (8.8)

Proceeds from disposal of investments 37.0 –

Stake acquisition from non-controlling interest (59.2) (120.0)

net cash used in investing activities (2,612.0) (640.0)

Cash flow from financing activitiesProceeds from capital contribution 630.2 108.7

Proceeds from issue of equity shares 1,812.3 –

Proceeds from borrowings 2,051.6 413.6

Repayment of borrowings (909.1) (195.8)

Movement in acceptances 22.2 213.9

Movement in bills of exchange and other financing 29.5 88.5

Interest paid (309.1) (228.8)

net cash provided by financing activities 3,327.6 400.1

Net increase in cash and cash equivalents 453.8 43.1

Effect of exchanges rate changes on cash and cash equivalents 38.5 15.3

Cash and cash equivalents at the beginning of the year 71.4 13.0

Cash and cash equivalents at the end of the year 563.7 71.4

Consolidated statement of cash flowsFor the year ended 31 December 2010


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1. presentation of financial statements1.1 Corporate informationEssar Energy plc (the ‘Company’) is a public limited Company incorporated in the United Kingdom. The address of the registered office is 3rd Floor, Lansdowne House, Berkeley Square, London, W1J 6ER and its head office is 6th Floor, DCDM Building 10, Frere Felix Valois Street, Port Louis, Mauritius.

The Company was incorporated in the UK on 18 December 2009 as a wholly owned subsidiary of Essar Global Limited (‘EGL’ or ‘Parent Company’).

Between 18 December 2009 and 7 May 2010, the Company was party to a series of transactions with other EGL group companies whereby it acquired control of the Refining and Marketing, Exploration and Production, and Power businesses of EGL prior to IPO.

The consolidated financial statements of the Company comprise the Company and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in joint ventures and associates.

The nature of the Group’s operations and its principal activities are set out in Note 29.

1.2 basis of preparationThe consolidated financial statements presented in this report have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union, IFRIC interpretations and the Companies Act applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale assets, and financial assets and liabilities.

The Group was formed under a series of transactions with entities under the same control as the Company, referred to as common control transactions. The Group’s policy is to prepare its consolidated financial statements using merger accounting principles, as if the transactions giving rise to the formation of the Group took place at the beginning of the comparative period.

Under these principles, the consolidated financial statements have been prepared as if the Company were the holding Company of EGL’s Refining and Marketing, Exploration and Production, and Power businesses from 1 January 2009, the date of the beginning of the comparative period. The Group has consolidated its subsidiaries from this date. Once control was obtained, further acquisitions of non-controlling interests have been dealt with through reserves.

Businesses which were transferred out of the ownership of the Group’s subsidiaries to entities held under common control have been excluded from the consolidated financial statements.

The assets, liabilities and the profit or loss of the entities comprising the Group have been consolidated and all transactions and balances between entities included within the Group consolidation have been eliminated.

Invested capital reflected the aggregated equity of the Refining and Marketing, Exploration and Production, and Power businesses, prior to the formation of the Group. At the point at which the Company became the parent company of the Group, the Group’s equity reflected the share capital and share premium of the Company, together with other reserves arising on consolidation as shown in the statement of changes in equity and Note 21.

The non-controlling interests in the Group’s subsidiary undertakings reduce throughout the period presented as a result of acquisitions by the Group of further investments in these subsidiaries.

Note 10 sets out how the Group has applied these principles in establishing its earnings per share.

EGL remains the ultimate Parent Company of the Group and its controlling party. The ultimate shareholders of EGL are the Virgo Trust and the Triton Trust, discretionary trusts whose beneficiaries include, among others, companies whose controlling shareholders are Mr Ravi Ruia and Mr Prashant Ruia who are Directors of Essar Energy plc.

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business review. The Business review also includes a summary of the Group’s financial position, its cash flows and borrowing facilities.

1.3 Going concernThe consolidated financial statements have been prepared on a going concern basis. This is discussed in the Financial review section of the annual report.

notes to the consolidated financial statements


1. presentation of financial statements continued1.4 Adoption of new and revised standardsIn the current year, the following new and revised standards and interpretations have been adopted by the Group, none of which had a material impact on the current or prior year reported results and the financial position:

IAS 1 (amended)/IAS 27 (amended)/IAS 31 (amended), Cost of an Investment in a Subsidiary, Jointly Controlled Entity or ¸¸

Associate;IFRS 2 (amended), Share-based Payment – Vesting Conditions and Cancellations and Group Cash-settled Share-based ¸¸

Payment Transactions;IFRS 3 (revised 2008), Business Combinations;¸¸

IAS 17 (amendment), Leases;¸¸

IAS 27 (revised 2008), Consolidated and Separate Financial Statements;¸¸

IAS 28 (revised 2008), Investments in Associates;¸¸

IAS 39 (amended), Financial Instruments: Recognition and Measurement: Eligible Hedged Items;¸¸

IAS 39 (amended) and IFRIC 9, Embedded Derivatives;¸¸

IFRIC 17, Distributions of Non-cash Assets to Owners;¸¸

IFRIC 18, Transfer of Assets from Customers; and¸¸

Improvements to IFRSs (April 2009).¸¸

1.5 Standards, interpretations and amendments to published standards that are not yet effectiveAt the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 9, Financial Instruments;¸¸

IAS 24 (amended), Related Party Disclosures;¸¸

IAS 32 (amended), Classification of Rights Issues;¸¸

IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments; ¸¸

IFRIC 14 (amended), Repayments of a Minimum Funding Requirement;¸¸

IFRS 7 (amended), Financial Instruments: Disclosures; and¸¸

Improvements to IFRSs (May 2010).¸¸

The adoption of IFRS 9, which the Group expects will be applicable for the year beginning on 1 January 2013, will impact both the measurement and disclosure of Financial Instruments. The Directors do not expect that the adoption of other standards listed above will have a material impact on the financial statements of the Group in future periods.

2. Accounting policies and estimates2.1 Significant accounting policies2.1.1 Business combinationsThe acquisition of subsidiaries and businesses from third parties are accounted for using the purchase method. The cost of acquisition is measured at the aggregate value of the identifiable assets, liabilities incurred or assumed and equity instruments issued by the Group on the basis of fair value at the date of acquisition in exchange for control of the acquiree, plus cost directly attributable to the acquisition, except for a business combination under common control which is described below. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (revised 2008) Business Combinations are recognised at their fair value at the date of acquisition, except for non-current assets that are classified as held for sale in accordance with IFRS 5 Non-Current Assets held for sale and discontinued operations which are recognised at fair value less costs to sell.

Where it is not possible to complete the determination of fair values by the date on which the first post-acquisition financial statements are approved, a provisional assessment of fair values is made and any adjustments required to those provisional fair values, and the corresponding adjustments to purchased goodwill, are finalised within twelve months of the acquisition date.

Goodwill arising on acquisition is recognised as an asset and is initially measured at cost, being the excess of the cost of the purchase consideration over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the fair values of the identifiable assets, liabilities and contingent liabilities exceeds the cost of acquisition, the excess is recognised immediately in profit or loss.

Goodwill is subsequently measured at cost less any accumulated impairment losses. Goodwill that is recognised as an asset and is initially measured at cost, is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. Internally generated goodwill is not recognised.

The interest of non-controlling shareholders in the acquiree is initially measured at the non-controlling shareholder’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised and subsequently also includes the non-controlling shareholder’s proportion of changes in equity since the date of combination.

The Group follows the entity concept method of accounting for changes in ownership interest in subsidiaries. In the event of a purchase of a minority shareholder’s interest where the Group holds the majority of shares of a subsidiary, any excess over the Group’s share of net assets is recorded in retained earnings.

notes to the consolidated financial statements continued


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2. Accounting policies and estimates continuedCommon control acquisitionsThe assets and liabilities of subsidiaries acquired from entities under common control are recorded at the carrying value recognised by the transferor. Any differences between the carrying value of the net assets of subsidiaries acquired, and the consideration paid by the Group is accounted for as an adjustment to retained earnings. When the transferor contributes the subsidiaries to the Group, the original cost paid by the transferor is recorded as capital investment with the differences recorded as an increase in retained earnings. The net assets of the subsidiaries and their results are recognised from the date on which control of the subsidiaries was obtained by the transferor.

2.1.2 GoodwillGoodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or joint controlled entity at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed.

For the purpose of impairment testing goodwill is allocated to each of the Group’s cash generating units expected to benefit from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.

On disposal of a subsidiary, associate or joint controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

2.1.3 Revenue recognitionRevenue from the sale of petroleum products is measured at the fair value of consideration received or receivable, net of trade discounts, volume rebates, value added tax, sales taxes and duties. A sale is recognised when economic benefits associated with the sale are expected to flow to the Group and the significant risks and rewards of ownership of the goods have passed and can be reliably measured. This is usually when title and insurance risk has passed to the customer.

Revenue from power supply is accounted for on the basis of billings to consumers or unbilled supply of power. Generally all consumers are billed on the basis of recording of consumption of electricity by installed meters. Sales of electricity are accounted for based on relevant tariff rates approved under the contract with the customer.

Revenue associated with sales tax deferral is recognised in accordance with the Group’s policy for accounting for government grants set out in 2.1.4.

2.1.4 Sales tax incentives The Group receives the benefit of certain sales tax incentives under the Capital Investment Incentive Premier/Prestigious Units Scheme 1995–2000 (the ‘Sales Tax Incentive Scheme’). The benefits under the Sales Tax Incentive Scheme are recognised when it is reasonable to expect that the benefit will be received and that all related conditions will be met. The benefit of a sales tax deferral with no associated interest outflow is recognised as a liability in accordance with the imputation rule under IAS 20 Accounting for Government grants and disclosure of Government Assistance. This deferred liability is measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The benefit of the effective market rate of interest (or no interest) is measured as the difference between initial carrying value of the financial liability as determined in accordance with IAS 39 and the sales tax collected.

The benefits under the Sales Tax Incentive Scheme are available only when eligible domestic sales are made from the State of Gujarat and the sale is therefore treated as the key condition giving rise to the recognition of the benefit. It is expected that all other conditions related to the deferral of sales tax will be met and therefore the benefit is recognised as eligible domestic sales are made. The deferred liability to the State is recognised at its net present value, and therefore a finance charge is recorded as the discount on this liability unwinds.

2.1.5 Foreign currency transactions and translationEach entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in currencies other than the functional currency are translated into functional currency at the exchange rates at the date of transaction. Monetary assets and liabilities denominated in other currencies are translated into functional currency at exchange rates at the reporting date and exchange differences are recognised in profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.


2. Accounting policies and estimates continuedThe consolidated financial statements are presented in US dollars. For the purposes of consolidation, the income statement items of those entities for which the US dollar is not the functional currency are translated into US dollars at the average rates of exchange during the year. The related balance sheets are translated at the rates at the balance sheet date. Exchange differences arising on translation are reported in the consolidated statement of changes in equity.

The rates used to translate the consolidated financial statements were as follows:

For the year ended 31 December2010 Rs/$

2009 Rs/$

Opening rates 46.68 48.45

Average rates 45.74 48.35

Closing rates 44.81 46.68

2.1.6 Derivative financial instrumentsIn order to reduce its exposure to foreign exchange, commodity price and interest rate risk, the Group enters into forward, option and swap contracts. The Group also enters into financial instruments to acquire non-controlling stakes of its subsidiaries to increase its stake. Additionally the Group provides warrants over stakes held in certain subsidiaries. The Group does not use derivative financial instruments for speculative purposes.

A derivative is presented as a non-current asset or liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.

At present, the Group’s derivative arrangements are not designated hedges under the definitions of IAS 39. Consequently, all fair value movements in respect of derivative financial instruments are taken to the income statement. Further details of derivative financial instruments including fair value measurements are disclosed in Note 20.

2.1.7 Property, plant and equipmentProperty, plant and equipment is stated at cost less accumulated depreciation and impairment losses, if any. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the decommissioning obligation, and for qualifying assets, borrowing costs if the recognition criteria are met.

The cost of mining properties and leases, which include the cost of acquiring and developing mining properties and mineral rights, are capitalised as property, plant and equipment in the period in which such costs are incurred.

Costs directly related to construction, including costs and revenues arising from testing, specific financing costs and foreign exchange losses, are capitalised up to the point where the property, plant and equipment become operational. Property, plant and equipment become operational once all testing and trial runs are complete and it is ready for use in the manner management intended. Income from the sale of products as a result of testing and trial runs of a new asset are part of the directly attributable cost of assets and therefore deducted from the cost of the asset. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. The capitalised value of a finance lease is also included within property, plant and equipment. Likewise, when a major inspection or major maintenance is undertaken, its cost is recognised in the carrying amount of the plant and equipment as a replacement if the recognition criteria are satisfied. All other repairs and maintenance costs are recognised in the profit or loss as incurred.

Property, plant and equipment in the course of construction is carried at cost, less accumulated impairment losses, if any, and is not depreciated.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised.

The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end.

Depreciation of property, plant and equipment other than freehold land and properties under construction is calculated to write off the cost of the asset to its residual value using the straight line method or the written down value method or on a unit of production basis as appropriate, over its expected useful life. Depreciation begins when the assets become ready for use.



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2. Accounting policies and estimates continuedDepreciation is calculated over the estimates useful lives of assets and on the basis of depreciation methods are as follows:

Asset Depreciation method

Expected useful life

(years)

Buildings Straight line 40

Plant and equipment

– Refinery Straight line 40

– Power plant Straight line 11-30

– Related assets Straight line 10-25

Producing properties Unit of production basis

Mining properties Unit of production basis

Office equipment and fixtures Straight line 3-20

Motor vehicles Written down value 9-11

Property, plant and equipment held under finance leases are depreciated over the shorter of lease term and estimated useful life.

2.1.8 Impairment of non-financial assets The carrying amounts of property, plant and equipment, including producing properties and leases, intangible asset (excluding goodwill) and investments in joint controlled entities are reviewed for impairment at each balance sheet date if events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. If there are indicators of impairment, an assessment is made to determine whether the asset’s carrying value exceeds its recoverable amount. Whenever the carrying value of an asset exceeds its recoverable amount, the carrying value of the asset or the cash generating unit is reduced to its recoverable amount and impairment loss is recognised in profit or loss.

An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

2.1.9 Borrowing costsBorrowing costs directly relating to the acquisition, construction or production of qualifying assets are added to the costs of those assets during the construction phase on an effective interest basis, until such time as the assets are ready for their intended use or sale which, in the case of producing or mining properties, is when saleable material begins to be extracted from such properties. Where surplus funds are available for a short term out of money borrowed specifically to finance a qualified asset, the income generated from such short term investments is deducted from capitalised borrowing costs.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

2.1.10 LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Assets held under finance leases are initially recognised as assets of the Group at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s policy on borrowing costs (see above).

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.

Payments made under operating leases, where the lessors effectively retain substantially all the risk and benefits of ownership of the lease property, plant and equipment are recognised in the income statement on a straight line basis over the lease term. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease. Property, plant and equipment used by the Group under operating leases are not recognised in the Group’s balance sheet.


2. Accounting policies and estimates continued2.1.11 Financial assetsAll financial assets are recognised and derecognised on a trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at Fair Value Through Profit or Loss (‘FVTPL’), which are initially measured at fair value.

The Group classifies its financial assets into the following specified categories; at FVTPL, cash and cash equivalents, loans and receivables and Available-for-sale (‘AFS’) financial assets. The classification is dependent on the nature and purpose of the financial assets acquired. Management determines the classification of its financial assets at initial recognition. Further details on the Group’s financial assets and fair value measurement are disclosed in Note 24.

Financial assets at FVTPLFinancial assets at FVTPL include financial assets held for trading or designated upon initial recognition as at FVTPL. Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss.

Financial assets are classified as held for trading if:acquired principally for the purpose of selling in the near term; ¸¸

they are a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual ¸¸

pattern of short-term profit-taking; orthey are derivatives unless these are designated as effective hedging instruments.¸¸

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; ¸¸

the financial asset forms part of a Group of financial assets or financial liabilities or both, which is managed and its performance ¸¸

is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the Grouping is provided internally on that basis; orit forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and ¸¸

Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item in the income statement. Fair value is determined in the manner described in Note 24.

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement loans and receivables are measured at amortised cost using the effective interest method less any allowance for impairment. Interest income is recognised by applying effective interest rate, except for short term receivables when the recognition of interest would be immaterial. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired as well as through the amortisation process.

AFS financial investments Listed shares held by the Group that are traded in an active market are classified as being AFS and are stated at fair value. The Group invests in unlisted shares that are not traded in an active market but classified as AFS financial investments and stated at fair value (because the Directors consider that fair value can be reliably measured). Fair value is determined in the manner described in Note 24. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated reserves with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investments revaluation reserve is reclassified to profit or loss.

Dividends on AFS equity instruments are recognised in profit or loss when the Group’s right to receive the dividend is established. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the balance sheet date. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income.

Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For financial assets carried at amortised cost the Group assesses whether objective evidence of impairment exists for assets that are individually significant, or collectively for financial assets that are not individually significant. Objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; ¸¸

default or delinquency in interest or principal payments; or¸¸

it becoming probable that the borrower will enter bankruptcy or financial reorganisation.¸¸



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2. Accounting policies and estimates continuedIf there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement.

For AFS financial investments, the Group assesses at each reporting date whether there is objective evidence that an investment or a Group of investments is impaired.

In the case of equity investments classified as AFS, objective evidence for impairment would include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement) is removed from other comprehensive income and recognised in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair value after impairment are recognised directly in other comprehensive income.

2.1.12 Financial liabilities Financial liabilities are classified as financial liabilities at FVTPL or other financial liabilities at initial recognition. The Group’s other financial liabilities include borrowings, trade and other payables and finance lease payables. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, include directly attributable transaction costs.

The measurement of financial liabilities depends on their classification as follows:

Financial liabilities at FVTPLFinancial liabilities at FVTPL include those held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on liabilities held for trading are recognised in the income statement.

Other financial liabilitiesOther financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.

Financial guarantee contractsThe Group provides certain guarantees in respect of the indebtedness of subsidiary undertakings, claims under contract and other arrangements in the ordinary course of business. The Group evaluates each arrangement to determine whether it is an insurance or a financial guarantee contract. Financial guarantee contract liabilities are measured initially at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of the amount of the obligation under the contract and the amount initially recognised less cumulative amortisation over period of guarantee is provided.

Once the arrangements are designated as insurance contracts, these are disclosed as contingent liabilities unless the obligations under guarantee become probable.

Derecognition of financial liabilitiesThe Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or expire.

2.1.13 Provisions and contingenciesProvisions are recognised when the Group has a present legal or constructive obligation, as a result of past events, and it is probable that an outflow of resources, that can reliably be estimated, will be required to settle such an obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows to net present value using an appropriate pre-tax discount rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Unwinding of the discount is recognised in the income statement as a finance cost. Provisions are reviewed at each balance sheet date and are adjusted to reflect the current best estimate.

A contingent liability is disclosed where the existence of an obligation will only be confirmed by future events or where the amount of the obligation cannot be measured reliably. Contingent assets are not recognised, but are disclosed where an inflow of economic benefits is probable.

In normal course of business, contingent liabilities may arise from litigation and other claims against the Group.


2. Accounting policies and estimates continued2.1.14 InventoriesInventories (other than crude oil extracted by the Exploration and Production segment) are valued at lower of cost and net realisable value. Crude oil extracted and in saleable condition is valued at net realisable value.

Cost is determined on the following bases:raw materials and consumables are determined at weighted average cost except crude oil for the refinery which is measured ¸¸

at first-in first-out basis. finished products and work in progress are determined at direct material cost, labour cost and a proportion of manufacturing ¸¸

overheads based on normal or allocated capacity. inventories held for trading purposes are determined at weighted average cost.¸¸

Net realisable value is determined by reference to estimated prices existing at the balance sheet date for inventories less all estimated costs of completion and costs necessary to make the sale.

2.1.15 Intangible assetsIntangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses, if any.

Intangible assets with finite lives are amortised over their useful lives and assessed for impairment whenever there is an indication that an intangible asset may be impaired. The asset’s useful lives and methods of amortisation are reviewed, and adjusted if appropriate, at each financial year end.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.

Intangible assets with finite lives which are subject to amortisation are amortised over their useful lives as mentioned below:

Intangible asset

expected useful life

(years)

Software 3-5

Power sales contract 20

2.1.16 Joint controlled entitiesA joint controlled entity is an entity in which the Group shares joint control over the strategic, financial and operating decisions with one or more ventures under a contractual arrangement.

Investment in joint controlled entities are accounted for using the equity method of accounting, except when the investment is classified as held for sale, which is recognised at fair value less costs to sell. In accordance with the equity method, investments in joint controlled entities are measured at cost plus post acquisition changes in the Group’s share of net assets of joint controlled entities, less any impairment in the value of individual investments.

Goodwill arising from the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised of the joint controlled entities is included in the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

The income statement reflects share of results of operations of the joint controlled entities. Where there has been a change recognised directly in equity of the joint controlled entities, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Profits and losses resulting from transactions between the Group and the joint controlled entities are eliminated to the extent of the Group’s interest in the relevant joint controlled entities.

2.1.17 Exploration and evaluation expenditureExploration and evaluation activity involves the search for oil and gas resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource.

Exploration and evaluation activity includes:researching and analysing historical exploration data;¸¸

gathering exploration data through geological and geophysical studies;¸¸

exploratory and appraisal drilling;¸¸

evaluating and testing discoveries;¸¸

determining transportation and infrastructure requirements; and¸¸

conducting market and finance studies.¸¸



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2. Accounting policies and estimates continuedAdministration costs that are not directly attributable to a specific exploration area are charged to the profit and loss account. License costs paid in connection with a right to explore an existing exploration area are capitalised. Exploration and evaluation expenditure (including amortisation of capitalised license costs) is charged to the profit and loss account as incurred except in the following circumstances:

the exploration and evaluation activity is related to an established discovery for which commercially recoverable reserves have ¸¸

already been established; orat the balance sheet date, exploration and evaluation activity has not reached a stage which permits a reasonable assessment ¸¸

of the existence of commercially recoverable reserves.

Capitalised exploration and evaluation expenditure considered to be tangible is recorded as a component of property, plant and equipment at cost less impairment losses, if any. All capitalised exploration and evaluation expenditure is monitored for indicators of impairment. Where a potential impairment is indicated, an impairment test of the capitalised exploration and evaluation expenditure is performed for each area of interest in conjunction with the Group or pool of operating assets (representing a cash generating unit) to which the exploration is attributed. To the extent that capitalised expenditure is not expected to be recovered it is charged to the profit and loss account. Exploration areas at which reserves have been discovered but that require major capital expenditure before production can begin are continually evaluated to ensure that commercial quantities of reserves exist or to ensure that additional exploration or evaluation work is under way or planned.

2.1.18 Development expenditureWhen commercially recoverable reserves are determined and development is sanctioned, the capitalised exploration and evaluation expenditure is transferred to assets under construction after impairment is assessed and any resulting impairment loss is recognised. Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells are capitalised as assets under construction.

On completion of a development, all capitalised exploration and evaluation expenditure together with the subsequent development expenditure transferred to producing properties are depreciated using unit of production method. This is carried out with reference to quantities, with depletion computed on the basis of the ratio that oil and gas production bears to balance proved and probable reserves at commencement of the year.

2.1.19 Tax Tax expense represents the sum of current tax and deferred tax.

Current tax is provided on taxable income at amounts expected to be paid or recovered, using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is provided, using the balance sheet method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

In India, the current tax payable by a company is charged to the income statement in the applicable period at the corporate tax rate computed under the normal provisions of the Indian Income Tax Act or the minimum alternate tax (MAT), whichever is higher. Excess paid under MAT can be carried forward for up to 10 years as a credit against corporate income tax in the future. Where the MAT credit satisfies the relevant criteria under IAS 12 Income Taxes, it is recognised as a deferred tax asset.

Deferred tax is recognised for all taxable temporary differences, except:where the deferred tax arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not ¸¸

a business combination and, at the time of the transaction, affects neither the accounting nor taxable profit or loss; andin respect of taxable temporary differences associated with investments in subsidiaries and interests in joint controlled entities, ¸¸

where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, unused tax credits carried forward and unused tax losses, to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the assets to be recovered. The carrying amount of deferred tax assets is reviewed at each balance sheet date and is adjusted to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset will be realised or the liability will be settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Current and deferred tax are recognised as an expense or income in the income statement, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or in determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over the cost of the business combination.


2. Accounting policies and estimates continuedDeferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same tax authority.

2.1.20 Cash and cash equivalentsCash and cash equivalents comprise cash at bank and in hand, short term deposits with banks with original maturity of less than 90 days and short term highly liquid investments, that are readily convertible into cash and which are subject to insignificant risk of changes in the principal amount. Bank overdrafts, which are repayable on demand and form an integral part of the operations are included in cash and cash equivalents.

2.1.21 Retirement benefitsThe Group operates both defined benefit and defined contribution schemes for its employees as well as post employment benefit plans. For defined contribution schemes the amount charged as expense is the contributions paid or payable when employees have rendered services entitling them to the contributions.

For defined benefit pension and post employment benefit plans, full actuarial valuations are carried out every year end using the projected unit credit method. Actuarial gains and losses arising during the year are recognised in profit and loss account.

Past service cost is recognised immediately to the extent that the benefits are already vested and otherwise is amortised on a straight line basis over the average period until the benefits become vested.

The employee benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as reduced by the fair value of the related plan assets. Any asset resulting from this calculation is limited to the reductions in future contributions to the plan.

Detailed disclosures are not provided within the financial statements as amounts associated with such schemes are not considered to be significant.

2.1.22 Share based paymentsThe cost of granting share options and other share-based remuneration is recognised in the income statement at their fair value at grant date. They are expensed straight-line over the vesting period, based on estimates of the shares or options that will eventually vest. Charges are reversed if it appears that non market performance will not be met. Options are valued using the Black-Scholes model.

During 2010 the Company granted options to the Executive Director and certain members of the Essar Energy senior management team to purchase shares under the Employee Share Option Plan (‘ESOP’). Details of the scheme and its performance criteria are set out in the Remuneration report. The total charge in the year relating to the scheme was US$45,506, which is not considered to be significant to the Group’s results and therefore no further disclosures have been provided within the financial statements.

2.1.23 IPO costsIncremental directly attributable costs incurred on issue of equity shares is offset against the share premium account in accordance with CA 2006 and IAS 23 Financial Instruments: Presentation.

2.2 Critical accounting judgments and key sources of estimation uncertaintyIn the course of applying the policies set out in section 2.1 above, management have made estimations and assumptions that impact the amounts recognised in the consolidated financial statements and related disclosures. Several of these estimates and judgments are related to matters that are inherently uncertain as they pertain to future events. These estimates and judgments are evaluated at each reporting date and are based on historical experience, internal controls, advice from external experts and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates may vary from the actual results. The Group believes that the assumptions, judgments and estimations that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period are the following areas:

2.2.1 Sales tax benefitThe Group benefits from certain sales tax incentives given by the State of Gujarat provided if the sales are made from the State of Gujarat. Under these incentive schemes, the Group is able to defer the payment of up to approximately Rs. 91 billion (US$1.95 billion) collected as sales tax for eligible domestic sales made from the State of Gujarat until the financial year ending 31 March 2021 (or earlier `if the full eligible limit is exhausted), after which it is required to repay the retained amounts of sales tax in six equal annual instalments. There are a number of conditions under which this benefit has been granted including: (i) ensuring that certain percentages of the employees are local people; (ii) re-investing certain amounts of the benefit; (iii) adhering to specified pollution control measures; and (iv) contributing a certain amount to the prescribed rural development scheme in the State of Gujarat. The Group recorded a benefit of US$292.6 million in the year ended 31 December 2010 (2009: US$220.3 million). The majority of the benefit is expected to be earned over a period of five to seven years from the date on which the Vadinar refinery commenced commercial operations in 2008.



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2. Accounting policies and estimates continuedThe amount of benefit recorded is based on management’s expectation that it will begin repayments in 2021 and that it will comply with all the related conditions. This is based on the fact that management intends to comply with all such conditions, is able to control its compliance, and intends to monitor the sales to allow the Group to benefit from the maximum deferral period. Any change in this assessment would result in a change in the benefit that would be recorded in that period.

The Group has recorded the sales tax benefit as revenue in the period in which the associated eligible domestic sales are made to customers. Under IAS 20, the benefit may only be recognised when there is reasonable assurance that the entity will comply with the conditions attached to the benefit and must be recognised over the period necessary to match the benefit systematically with the related costs which they are intended to compensate. Recognition of the benefit in profit or loss on a receipts basis is appropriate only where no suitable basis exists for allocating the benefit to periods other than the one in which it is received.

Management has exercised its judgement in assessing the period over which to recognise the benefit and believes there are no significant costs or expenses that the incentive is intended to compensate, as the plant’s location was determined before the incentive became available and as this incentive was set up, amongst other things, to improve the economic wellbeing of the State of Gujarat. Accordingly, the Group has recognised the benefit in the period of the eligible domestic sales made from the State of Gujarat, being the primary condition associated with the benefit. An alternative view would be that the sales tax benefit is intended to compensate recipients for the costs of setting up and/or conducting their business in the State of Gujarat, in which case the benefit could be recognised over the period necessary to match such costs. For example, a differing judgement may be to (a) recognise the benefit during the period in which the Company incurs operating expenses whilst it enjoys the benefit (for example, 13 years being the remaining period for which the sales tax payment can be deferred) or (b) recognise the benefit over the expected life of the capital asset constructed, namely the Vadinar refinery (the depreciation period for which is 40 years) both of which would result in materially different results in the periods presented with significantly lower revenue and profit.

Further, the Group’s eligibility to participate in the Scheme is being challenged by the State Government of Gujarat (see Note 27).

2.2.2 Contingencies and commitmentsIn the normal course of business, contingent liabilities may arise from litigation and other claims against the Group. Potential liabilities that have a low probability of crystallising or are very difficult to quantify reliably, are treated as contingent liabilities. Such liabilities are disclosed in the notes but are not provided for in the consolidated financial statements. There can be no assurance regarding the final outcome of these legal proceedings, but the Group does not expect them to have a materially adverse impact on its financial position or profitability. For further details, refer to Note 27.

2.2.3 Depreciable livesThe Group’s relevant non-current assets are depreciable over their estimated useful lives as set out in section 2.1 above. Such lives are dependent upon an assessment of both the technical lives of the assets and also their likely economic lives based on factors including commodity prices, alternative sources of supply, relative efficiency and operating costs. Accordingly depreciable lives are reviewed annually using the best information available to management.

2.2.4 Impairment testingGoodwill is tested for impairment annually. Other non-current assets are tested for impairment when conditions suggest that there is a risk of impairment. Where impairment testing is carried out, management use the best information available to them to assess the likely cash flows available to the relevant asset. Key assumptions are inherently uncertain and include commodity prices, anticipated production costs, likely asset lives, the timing of granting of licenses and permits and the relevant discount rates.

2.2.5 TaxThe Group is subject to tax, principally within India. The amount of tax payable in respect of any period is dependent upon the interpretation of the relevant tax rules. Whilst an assessment must be made of the deferred tax position of each entity within the Group, these matters are inherently uncertain until the position of each entity is agreed with the relevant tax authorities.

2.2.6 Exploration and evaluation expenditureExploration and evaluation expenditure are capitalised in accordance with the accounting policy in Note 2.1.17. In making a decision about whether to continue to capitalise exploration and evaluation expenditures, it is necessary to make judgements about the satisfaction of, if (a) proved reserves are booked or (b) (i) if they have found commercially producible quantities of reserves and (ii) if they are subject to further exploration or appraisal activity in that either drilling of additional exploratory wells is under way or firmly planned for the near future or other activities are being undertaken to sufficiently progress the assessing of reserves and the economic and operating viability of the project. If there is a change in one of these judgements in a subsequent period, then the related capitalised exploration and evaluation expenditures would be expensed in that period resulting in a charge to income. For further details, refer to Note 11.


3. Segment informationInformation reported to the Board for the purpose of resource allocation and assessment of performance is primarily determined by the nature of the different activities that the Group engages in, rather than the geographical location of these operations. This is reflected by the Group’s organisational structure and internal financial reporting systems. The profitability of the segments is reviewed based on profit or loss after tax and is based on IFRS. The Group has the following reportable operating segments:

Power: The Group operates gas and liquid fuel based power plants in India and Canada together with a number of mining ¸¸

assets. Exploration and Production: The Group has a diverse portfolio of 17 blocks for the exploration and production of oil and gas in ¸¸

India, Australia, Indonesia, Madagascar, Nigeria and Vietnam.Refining and Marketing: The Group owns a petroleum refinery on the west coast of India, together with a 50% interest in a ¸¸

petroleum refinery in Kenya, and fuel retailing stations on franchise across India. Its main products are gasoil, motor spirit, fuel oil and superior kerosene oil. The activities of Refining and Marketing include the refining of crude oil and trading, marketing and transportation of finished products and by products. Centre: This comprises Essar Energy plc and its subsidiary companies that provides services to the Group as a whole.¸¸

3a. Operating segmentsThe following tables present revenue, profit and certain asset and liability information regarding the Group’s operating segments for the years ended 31 December 2010 and 2009:

for the year ended 31 December 2010power

$ million

exploration and

production $ million

Refining and

Marketing $ million

Centre $ million

eliminations $ million

total $ million

Revenue from external customers 321.8 3.2 9,388.0 – – 9,713.0Sales tax benefit – – 292.6 – – 292.6Inter-segment revenue 27.8 – – – (27.8) –total segment revenue 349.6 3.2 9,680.6 – (27.8) 10,005.6

Cost of sales (183.5) (4.1) (9,128.4) – 27.8 (9,288.2)Gross profit 166.1 (0.9) 552.2 – – 717.4Other operating income 3.9 2.0 28.1 0.1 (0.1) 34.0Selling and distribution expenses – – (91.7) – – (91.7)General and administration expenses (15.4) (3.1) (92.0) (10.5) 0.1 (120.9)Finance income 3.7 – 43.8 3.0 (1.3) 49.2Finance cost (71.2) (1.9) (262.6) (2.2) 1.3 (336.6)Other gains/(losses) 24.6 2.8 45.4 41.3 – 114.1Segment (loss)/profit 111.7 (1.1) 223.2 31.7 – 365.5Tax (37.6) – (75.1) (4.5) – (117.2)profit/(Loss) after tax 74.1 (1.1) 148.1 27.2 – 248.3

Depreciation and amortisation (42.2) (0.3) (84.5) – – (127.0)

For the year ended 31 December 2009Power

$ million

Exploration and

Production $ million

Refining and Marketing

$ millionCentre

$ millionEliminations

$ millionTotal

$ million

Revenue from external customers 265.1 – 6,538.4 – – 6,803.5

Sales tax benefit – – 220.3 – – 220.3

Inter-segment revenue 26.8 – 0.2 – (27.0) –

total segment revenue 291.9 – 6,758.9 – (27.0) 7,023.8

Cost of sales (167.5) (1.2) (6,303.9) – 27.0 (6,445.6)

Gross profit 124.4 (1.2) 455.0 – – 578.2

Other operating income 3.8 – 13.7 – – 17.5

Selling and distribution expenses – – (76.7) – – (76.7)

General and administration expenses (15.0) (0.9) (89.5) – – (105.4)

Finance income 2.0 0.1 23.9 – – 26.0

Finance cost (54.6) (0.4) (254.8) – – (309.8)

Other gains/(losses) 7.2 (6.0) 154.7 – – 155.9

Segment (loss)/profit 67.8 (8.4) 226.3 – – 285.7

Tax (13.7) (0.5) (64.7) – – (78.9)

profit/(Loss) after tax 54.1 (8.9) 161.6 – – 206.8

Depreciation and amortisation (35.9) (0.1) (78.0) – – (114.0)



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3. Segment information continuedSales between the segments are made at contractually agreed prices. The segment revenues and segment results include transaction between business segments. All inter and intra transactions including all profit or loss made within these segments are eliminated on Group combination.

There is no comparative information for the centre as it did not exist in the comparative period. Material non-cash transaction in the periods presented include gifting of shares in subsidiaries by the Parent Company on reorganisation of the Group prior to IPO as described in Notes 2.1 and 21.

Three customers in the Refining and Marketing segment contributing revenues of US$2,414.5 million, US$1,512.5 million and US$1,309.9 million respectively accounted for approximately 52% of the Group’s net sales (2009: Three customers in the Refining and Marketing segment contributing revenues of US$1,820.9 million, US$1,152.1 million and US$1,172.8 million respectively accounted for approximately 59% of the Group’s net sales).

Segment assets and liabilities

2010

As at 31 Decemberpower

$ million

exploration and

production $ million

Refining and

Marketing $ million

Centre $ million

eliminations $ million

total $ million

Segment assets 4,493.6 276.7 7,409.3 634.9 (340.3) 12,474.2Borrowings 1,777.6 23.4 2,696.6 – – 4,497.6Other liabilities 855.8 14.0 2,761.9 12.6 (309.8) 3,334.5Segment liabilities 2,633.4 37.4 5,458.5 12.6 (309.8) 7,832.1

2009

As at 31 DecemberPower

$ million

Exploration and

Production $ million

Refining and

Marketing $ million

Centre$ million

Eliminations $ million

Total $ million

Segment assets 2,051.1 243.8 5,871.3 – (150.4) 8,015.8

Borrowings 773.2 5.5 2,330.3 – – 3,109.0

Other liabilities 494.6 112.1 2,382.5 – (121.2) 2,868.0

Segment liabilities 1,267.8 117.6 4,712.8 – (121.2) 5,977.0


3. Segment information continued3b. Geographical informationThe Group’s operations are mainly located in India. The following table provides an analysis of the Group’s revenue by destination, irrespective of the origin of the goods:

For the year ended 31 December2010

$ million2009

$ million

India 6,918.3 5,489.9

Indonesia 900.4 341.5

Singapore 836.1 142.3

United Arab Emirates 749.7 672.7

Other 601.1 377.4

total revenue 10,005.6 7,023.8

4. Revenue


$ million2009

$ million

Sale of petroleum products 9,391.2 6,538.4

Revenue from power supply 321.8 265.1 Sales tax benefit 292.6 220.3

Revenue 10,005.6 7,023.8

Other operating income 34.0 17.5

Finance income 49.2 26.0

total revenue 10,088.8 7,067.3

The sales tax benefit above relates to the benefit recognised on eligible domestic sales within the State of Gujarat from the Vadinar refinery. Under the incentive scheme, sales tax collected from customers within Gujarat is deferred for payment to the State of Gujarat by up to 17 years. This deferral gives rise to time value benefit as the difference between the cash received and the net present value of the liability to the State. The benefit is earned as the eligible domestic sales are made within the State of Gujarat as the benefit does not compensate the Group for any particular costs or expenses, and the Group expects all other conditions related to the benefit to be met in full. The benefit is included within revenue as it is derived directly from sales made to customers.

5. profit before tax


$ million2009

$ million

Profit before tax is stated after charging:

Consumption cost of raw materials (9,011.6) (6,194.5)

Losses on commodity derivatives recognised within gross profit (61.2) (7.6)

Depreciation and amortisation (127.0) (114.0)

Staff costs (42.4) (31.2)

Cost of inventories recognised as an expense includes inventory write downs amounting to nil (2009: US$13.4 million).

Average employee numbers


no.2009

No.

Refining and Marketing 1,389 1,242

Exploration and Production 210 174

Power 748 534

Centre 10 –

2,357 1,950



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5. profit before tax continuedStaff costs


$ million2009

$ million

Salaries and wages (55.8) (35.2)

Defined benefit plans (1.9) (1.3)

Defined contribution plans (1.1) (0.3)

total staff cost (58.8) (36.8)

Less: staff cost capitalised 16.4 5.6

Staff costs charged to the income statement (42.4) (31.2)

6. net finance costs


$ million2009

$ million

finance costsInterest (369.8) (274.2)

Bank charges (85.1) (80.8)

Other (16.8) (8.4)

total finance costs (471.7) (363.4)

Less: borrowing costs capitalised 154.6 62.0

Unwinding of discount (19.5) (8.4)

finance cost charged to the income statement (336.6) (309.8)

finance incomeInterest accrued on assigned receivables 17.5 5.7

Interest income on bank deposits 46.7 23.1

total finance income 64.2 28.8

Less: interest income capitalised (15.0) (2.8)

finance income recognised in the income statement 49.2 26.0

net finance costs (287.4) (283.8)

Borrowing costs capitalised during the year relate to interest ranging from 1.3% to 13.75% (2009: 1.0% to 14.5%) incurred on specific borrowings undertaken to finance construction of assets.

As sales tax is collected from customers, a corresponding liability to the State of Gujarat is recognised at its net present value. Accordingly, the discount on the liability unwinds over time resulting in the finance costs as shown above. In a related transaction, the Group has deposited amounts based on the net present value of its future sales tax payments with a related party. The interest accruing on these deposits of 9.0% (2009: 9.1%) per annum is included in finance income above.

7. Other gains


$ million2009

$ million

Foreign exchange gains 94.4 136.1

Share of profit from joint controlled entities 1.7 0.7

Profit on sale of available for sale investments 11.2 –

Surplus on acquisition of joint controlled entities (Note 26) – 19.1

Gain on settlement of liabilities 10.1 –

Other (3.3) –

total other gains 114.1 155.9

Included in foreign exchange gains is a non-operational gain of US$41.3 million (2009: nil) from the conversion of the initial public offering proceeds into US dollars with the remainder US$53.1 million (2009: US$136.1 million) arising from operational payments to creditors and receipts from customers in US dollars where the settlement date rate was different from the transaction date or closing period rate.


8. Auditor’s remuneration


$ million2009

$ million

Fees payable to the Company’s auditors for audit of:

Essar Energy plc annual accounts 0.1 –

The audit of the Company’s subsidiaries pursuant to legislation 1.5 0.9

total audit fees 1.6 0.9

Fees payable to the Company’s auditors and their associates for other services to the Group

Other services pursuant to legislation1 3.4 –

Other 0.2 0.1

total non-audit fees 3.6 0.1

Audit fees payable to other auditors of the Group’s subsidiaries – 0.2

total 5.2 1.2

1 Includes fees of US$3.0 million in respect of Reporting Accountant services provided as part of the IPO.

9. tax


$ million2009

$ million

Current Tax (30.6) (2.8)

Deferred Tax (86.6) (76.1)

Income tax expense (117.2) (78.9)

Effective tax rate (%) 32.1 27.6

A reconciliation of the income tax expense applicable to the profit before income tax at the standard statutory income tax rate in India to the income tax expense at the Group’s effective income tax rate for the years ended 31 December 2010 and 2009 is as follows:


$ million2009

$ million

profit before tax 365.5 285.7

Income taxTax at the standard rate of corporation tax 33.41% (2009: 33.99%) (122.1) (97.1)

Surplus on acquisition of joint controlled entities – 2.9

Deferred tax not recognised 14.7 (1.9)

Minimum alternate tax (MAT) (25.7) (3.9)

Tax holidays/non taxable income 15.9 2.5

Effect of non-Indian rates 6.1 0.8

Adjustment in respect of prior period (8.3) 6.0

Impact of reduction in tax rates 2.4 –

Others (0.2) 11.8

Income taxes recognised in the income statement (117.2) (78.9)

The applicable tax rate is the standard effective corporate income tax rate in India. The Indian tax rate decreased from 33.99% to 33.22% with effect from 1 April 2010. Indian companies are subject to corporate income tax or MAT. If MAT is greater than corporate income tax then MAT is levied. MAT is charged on book profits at a rate of 19.93% (2009: 16.995%). Excess paid under MAT can be carried forward for up to 10 years as a credit against corporate income tax in the future.



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9. tax continuedDeferred tax assets and liabilities

As at 31 December2010

$ million2009

$ million

Deferred tax assetProperty, plant and equipment – 0.3

Unabsorbed depreciation 139.4 18.0

Accruals 70.1 170.4

Borrowings 19.9 18.6

Provisions 14.9 17.0

Other temporary differences 35.0 17.0

total deferred tax asset 279.3 241.3

Deferred tax liabilitiesProperty, plant and equipment 541.8 398.2

Intangible assets 20.8 16.4

Borrowings – 0.4

Other temporary differences 15.9 5.7

total deferred tax liability 578.5 420.7

net deferred tax liability 299.2 179.4

The net deferred tax liability is recorded in the financial information based on the tax position of each Group company as follows:

Movement in deferred tax liabilities


$ million2009

$ million

Opening balance 179.8 101.3

Addition due to acquisition (Note 25) 23.1 –

Charged to income statement 86.4 76.1

Exchange difference 10.1 2.4

closing balance 299.4 179.8

movement in deferred tax assets


$ million2009

$ million


Credited to income statement (0.2) –

closing balance 0.2 0.4

Deferred tax recognised in income statement


$ million2009

$ million

Depreciation and amortisation (153.4) (71.4)

Borrowings (5.3) (0.4)

Others 72.1 (4.3)

total deferred tax recognised in income statement (86.6) (76.1)


9. tax continuedThe Group has not recognised deferred tax assets related to unutilised tax losses. These temporary differences will expire in accordance with prevailing tax laws as follows:


$ million2009

$ million

expiry date31 March 2012 – 6.2

31 March 2014 0.7 9.1

31 March 2015 – 3.7

31 March 2016 – 2.0

total 0.7 21.0

The Group also has not recognised deferred tax assets of US$31.1 million (2009: US$7.1 million) in respect of credits for MAT which have not been recognised.

No deferred tax asset has been recognised for the above losses and credits on the grounds that it is not probable that suitable taxable profits will arise before the tax losses and credits expire. The recoverability of the unrecognised deferred tax asset will be reviewed at future balance sheet dates.

The deferred tax liabilities for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries or joint controlled entities have not been recognised as:(i) the Group has determined that undistributed profit of its subsidiaries will not be distributed in the foreseeable future, but rather

tax-free returns of capital may be made if necessary; and(ii) the Group’s joint controlled entities cannot distribute their profits without consent of all joint controlled entities partners.

The Group does not foresee giving such consent at the balance sheet date.

The temporary differences associated with investment in subsidiaries and joint controlled entities, for which deferred tax liabilities have not been recognised, as explained above, amount to US$166.0 million (2009: US$151.8 million).

10. earnings per shareBasic earnings per share is calculated by dividing profit after tax for the period attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the period.

As noted in the basis of preparation in Note 1, the financial statements combine the results, assets and liabilities of the Refining and Marketing, Exploration and Production, and Power businesses acquired by the Company under the reorganisation prior to IPO. During the period, the holding companies of the Refining and Marketing, Exploration and Production, and Power businesses provided cash in exchange for equity in the underlying Group. To reflect this in earnings per share, the weighted average number of shares is calculated on the basis that this cash represented the acquisition of shares at the listing price of £4.20 per ordinary share throughout both the current and the comparative period presented.

The Company issued 999,999,980 fully paid shares to its Parent Company for a total of US$1,491.1 million in April 2010. At the date of Listing (7 May 2010) a further 303,030,302 shares were issued, and as part of the Listing there was a subsequent issue of 406,991 shares as an over-allotment option on 4 June 2010.

Since 1 January 2009 the cash and the related equivalent number of shares calculated as though issued at the listing price of £4.20 was as follows:

Shares representing: Shares

Invested capital as at 1 January 2009 884,541,083

Capital contributed in cash in 2009 of US$150.1 million 23,352,656

Invested capital at 1 January 2009 907,893,739

Capital contributed in cash in 2010 of US$593.2 million 92,106,261

Issued on IPO 303,437,293

Shares capital at 31 December 2010 1,303,437,293

The shares presented above reflect capital contributions made to the Group by its Parent Company prior to IPO in cash and are different to the amounts presented in the Consolidated Statement of Changes in Equity, which also include non-cash gifted investments.

The options issued as per the ESOP scheme in 2010 did not result in a significant dilutive potential impact.



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10. earnings per share continuedThe following table contains computations for basic earnings per share:

For the year ended 31 December 2010 2009

Profit after tax attributable to equity holders of the Company ($ million) 201.5 152.8

Weighted average number of ordinary shares for basic earnings per share (million) 1,177.1 896.2

Basic and diluted Earnings per share (US cents per share) 17.1 17.0

11. property, plant and equipment

producing properties

$ million

freehold land and

buildings $ million

plant and equipment

$ million

assets under

construction $ million

mining properties

$ million

exploration and

evaluation $ million

other $ million

total $ million

costat 1 January 2009 34.4 244.7 3,463.2 715.6 – 81.2 8.6 4,547.7

Additions – 36.3 29.8 840.9 – 26.3 2.6 935.9

Transfers 2.5 12.9 144.3 (159.8) – (2.5) 2.6 –

Disposals – – (0.3) – – – – (0.3)

Exchange difference 1.4 10.6 142.4 54.9 – 2.3 0.6 212.2

at 31 December 2009 38.3 304.5 3,779.4 1,451.6 – 107.3 14.4 5,695.5

Additions 1.8 29.6 8.4 2,491.4 143.3 49.2 8.6 2,732.3

Addition due to business combination (Note 25) – – – 3.9 69.4 – 0.1 73.4

Transfers – 1.8 72.2 (74.7) – – 0.7 –

Disposals – – (1.1) – – – (0.3) (1.4)

Exchange difference 1.6 13.5 163.0 113.1 (3.1) 3.6 0.8 292.6

at 31 December 2010 41.7 349.4 4,021.9 3,985.3 209.6 160.1 24.3 8,792.3

accumulated depreciationAt 1 January 2009 0.3 9.2 104.0 – – – 3.1 116.6

Charge for the year – 7.1 107.3 – – – 1.9 116.3

Exchange difference – 0.6 7.9 – – – 0.2 8.7

at 31 December 2009 0.3 16.9 219.2 – – – 5.2 241.6

Charge for the year 0.2 7.7 113.5 – – – 2.8 124.2

Disposals – – (1.0) – – – (0.1) (1.1)

Exchange difference – 1.0 14.6 – – – 0.2 15.8

at 31 December 2010 0.5 25.6 346.3 – – – 8.1 380.5net carrying valueat 31 December 2009 38.0 287.6 3,560.2 1,451.6 – 107.3 9.2 5,453.9

at 31 December 2010 41.2 323.8 3,675.6 3,985.3 209.6 160.1 16.2 8,411.8

major items included in asset under construction


$ million2009

$ million

Power plants 2,646.3 838.4

Expansion of petroleum refinery 1,339.0 613.2

3,985.3 1,451.6

Materially all property, plant and equipment held by the Group are subject to securities provided in respect of bank borrowings and contingent interest payable as described in Notes 18 and 27, respectively.

The carrying value of assets held under finance leases included above is set out below:


$ million2009

$ million

Buildings 5.1 5.7

Plant and equipment 10.1 18.1

Others 0.2 0.2

total assets under finance lease 15.4 24.0


12a. Other intangible assets

power sales

contract $ million

Software $ million

total $ million

CostAt 1 January 2009 46.3 6.9 53.2

Additions – 0.6 0.6

Exchange difference 7.3 0.3 7.6

At 31 December 2009 53.6 7.8 61.4

Additions – 1.0 1.0


At 31 December 2010 56.5 9.1 65.6

Accumulated amortisationAt 1 January 2009 – 0.7 0.7

Amortisation 1.6 1.4 3.0

Exchange difference – 1.1 1.1

At 31 December 2009 1.6 3.2 4.8

Amortisation 2.8 1.6 4.4


At 31 December 2010 4.5 5.0 9.5

net book valueAt 31 December 2009 52.0 4.6 56.6

At 31 December 2010 52.0 4.1 56.1

12b. Goodwill


$ million2009

$ million


Exchange differences 6.1 4.6

Closing balance 133.6 127.5

Goodwill relates to the following acquisitions:


$ million2009

$ million

Refining and Marketing business segmentPetroleum refinery 101.7 96.6

power busines segmentBhander power plant, Hazira 4.8 4.7

Essar power plant, Hazira 27.1 26.2

Closing balance 133.6 127.5

In assessing whether goodwill has been impaired, the carrying amount of the cash generating unit (including goodwill) is compared with the recoverable amount of the cash generating unit. The recoverable amount is the higher of fair value less costs to sell and value in use. In the absence of any information about the fair value of a cash generating unit, the recoverable amount is deemed to be the value in use. The Group calculates the recoverable amount as the value in use using a discounted cash flow model. The future cash flows are adjusted for risks specific to the cash generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the applicable business segment weighted average cost of capital and is adjusted where applicable to take into account any specific risks relating to the country where the cash generating unit is located.

Petroleum refinery The five-year business plans are used together with long term market expectations to estimate gross refining margins and other cash flows, which are approved on an annual basis by management, and are the primary source of information for the determination of value in use based on a discount factor of 11.43% p.a. (2009: 10.77% p.a.). The three-year business plans contain forecasts for refinery throughputs, sales volumes for various types of refined products, revenues, costs and capital expenditure. As an initial step in the preparation of these plans, various economic assumptions, such as oil prices, refining margins, refined product margins and cost inflation rates, are set by senior management. The estimated recoverable amount for the refinery unit exceeds its carrying amount in all periods.



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12. Other intangible assets continuedGross Refining Margin (‘GRM’) is the difference between revenue from refined petroleum products and related cost of crude oil used for their production. GRM is calculated based on market information and past experience of management. Prices of the petroleum products and crude are exposed to movement in crude prices on the Nymex, International Petroleum Exchange and Dubai Mercantile Exchange. If GRM falls by 26% (2009: 35%) compared to what is considered for impairment testing, Refinery Project’s recoverable amount would be equal to its carrying amount.

The discount rate is estimated based on the weighted average cost of the capital of Essar Oil Limited (‘EOL’). If the discount rate increases by 42% (2009: 72%) above what is considered for impairment testing, Refinery Project’s recoverable amount would be equal to its carrying amount.

Power plantsThe Group uses the long term power sale agreements for estimating the cash flows, which are approved based on signed contracts in place and are the primary source of information for the determination of value in use based on a discount factor of 10.60% p.a. (2009: 11.02% p.a). These contain forecasts for plant load factor, generation in Megawatts (‘MW’), fixed and variable revenue, operating costs and sustaining capital expenditure. The cash flow projections are based on these forecasts which are approved by senior management. The estimated recoverable amount for the power plants significantly exceeds its carrying amount in all cases and no impairment is necessary at the end of periods presented. The sensitivity analysis described below in respect of key input assumptions used to assess impairment of goodwill is for information purposes only, and variation of such factors does not lead to a need for impairment.

Plant load factor is the generation capacity of the plant at a given point in time and is based on the demand from the customer with a direct impact on variable revenue. If plant load factor falls by 10%, the recoverable amount will decrease by US$21.0 million (2009: US$31.0 million). Similarly if plant load factor increases by 10%, then the recoverable amount of power plans will increase by US$14 million (2009: US$16 million).

Discount rates reflect the current market assessment of the risks specific to each cash generating unit. The discount rate is estimated based on the weighted average cost of the capital of power entity. A 1% increase in discount rate reduces the recoverable amount by US$18.6 million (2009: US$23.5 million).

13. Available for sale investments


$ million2009

$ million

Opening balance 41.3 –

Additions – 28.8

Disposals1 (37.0) (4.9)

Movement in fair value (2.3) 15.8

Exchange difference (2.0) 1.6

balance as at 31 December – 41.3

1 Includes disposal of 3.23% of shareholding in Essar Steel Limited, an unlisted company in which EGL is the majority shareholder. These shares were sold by the Group to Essar Steel Holdings Limited, a company in the EGL group, for cash at their fair value at the date of disposal for US$33.4 million.

14. trade and other receivables14a. trade and other receivables (current)


$ million2009

$ million

Trade receivables 754.0 627.0

Receivable from related parties 182.6 80.9

Tax receivable 12.4 18.3

Sales tax receivable 52.9 50.8

Others receivables 45.7 36.3

Prepayments 28.4 31.6

Advances to suppliers 13.2 14.2

total current trade and other receivables 1,089.2 859.1

The credit period given to customers ranges from zero to 90 days. The Group has discounted receivables amounting to US$144.5 million (2009: US$107.2 million) with the lenders having recourse to the Group in the event of default by the debtor to settle the bills discounted with the lender. These debtors have been included under trade receivables disclosed above as they do not qualify for de-recognition.

Management consider that the carrying amount of trade and other receivables is approximately equal to their fair value. Details of the ageing of receivables are set out in Note 23.

Sales tax receivable represents amount receivable by EOL from the sales tax authorities being sales tax collected and deposited for the period when EOL was entitled to the sales tax deferral scheme. For further details, see Note 27.


14. Trade and other receivables continued14b. Trade and other receivables (non-current)


$ million2009

$ million

Receivable from related parties 293.2 124.5

Others 43.6 38.6

Prepayments 87.9 30.0

Advances to suppliers – 1.3

Total non-current trade and other receivables 424.7 194.4

Amounts receivable from related parties include US$275.1 million (2009: US$121.6 million) which reflects sales tax collected and deposited with the relevant related party. The relevant related party has committed that such amounts plus interest will be available to meet the Group’s sales tax liability when it becomes due in up to 17 years.

15. Other financial assets15a. Other financial assets (current)


$ million2009

$ million

Bank deposits 498.6 235.6

Other deposits 15.8 57.0

Total current other financial assets 514.4 292.6

15b. Other financial assets (non-current)


$ million2009

$ million

Bank deposits 30.8 –

Other deposits 21.1 18.5

Total non-current other financial assets 51.9 18.5

Bank deposits include restricted cash of US$509.8 million (2009: US$235.0 million). Restricted cash represents margin deposits with banks against various bank facilities such as guarantees, letters of credit for import of raw material and capital goods. Other deposits are principally deposits to government controlled business parties. Materially all other financial assets held by the Group are subject to securities provided in respect of bank borrowings and contingent interest payable as described in Notes 18 and 27, respectively.

16. Inventories


$ million2009

$ million

Raw material and consumables 778.0 562.8

Work in progress 289.9 152.0

Finished products 126.3 149.4

Total inventories 1,194.2 864.2

Materially all inventories held by the Group are subject to securities provided in respect of bank borrowings and contingent interest payable as described in Notes 18 and 27, respectively.

Inventory write-downs during the year ended 31 December, 2010 of nil (2009: US$13.4 million) were recorded to adjust inventories to net realisable value and recognised as an expense in cost of sales in the period.

17. Cash and cash equivalents


$ million2009

$ million

Cash at banks 97.7 23.7

Liquid investments 386.0 21.4

Bank deposits 80.0 26.3

Total cash and cash equivalent 563.7 71.4

Bank deposits have a maturity period of less than 90 days. Liquid investments represent cash deposited in mutual funds which are fully liquid and can be realised without notice. Materially all cash and cash equivalents held by the Group are subject to securities provided in respect of bank borrowings and contingent interest payable as described in Notes 18 and 27, respectively.

Notes to the consolidated financial statements continued


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18. borrowings


$ million2009

$ million

Non-convertible debentures 214.9 104.2

Banks and Financial Institutions 3,524.4 2,349.5

Optionally Cumulative Redeemable Preference Shares 109.8 86.4

Working Capital Loans 321.6 367.6

Bills of exchange 136.2 107.2

Loans from related parties 213.9 97.8

total borrowings 4,520.8 3,112.7

Less: unamortised debt issue cost (23.2) (3.7)

net borrowings 4,497.6 3,109.0

Current borrowing 750.0 918.9

non-current borrowing 3,747.6 2,190.1

In addition to the amounts shown above, the Group also has long term liabilities, particularly in respect of deferred sales tax, set out in Note 19b.

Secured non-convertible debenturesNon-convertible debentures include US$92.2 million (2009: US$104.2 million) of debentures issued during 1995-96 at coupon rates of 6.0% to 12.5% per annum (interest expensed at effective interest rate of 10.3%), repayments of which commenced on 30 April 2006 and will continue until 24 September 2018.

During the year, the Power business issued non-convertible debentures of US$122.7 million at coupon rates of 10.25% to 11.25% per annum (interest expensed at effective interest rate of 10.8%), repayments of which will commence on 31 March 2011 and will continue until 31 March 2018.

The Power business has not yet created a security in favour of certain debenture holders, whose debentures have a carrying value of US$44.6 million (2009: nil), in accordance to the related debenture trust deed. This default is not considered to be significant and related terms including the maturity profile remain unchanged. These amounts have been classified within current liabilities as at 31 December 2010.

bank and financial Institutions The Group has borrowings under various loan agreements with a number of banks and financial institutions. These lenders provide the Group with term loans, revolving facilities and letters of credit facilities.

Borrowings from banks and financial institutions of US$1,658.0 million (2009: US$1,659.9 million) are subject to a master restructuring agreement (‘MRA’) entered into by EOL with the lenders on 17 December 2004, prior to its acquisition by the Group. The MRA provided EOL an option to make early repayments at any time over the term of borrowings. The interest rates ranging from 8% to 13% per annum are subject to variation on prepayment of any borrowings. Other loans held by the Group include an amount due to American Express Bank Limited (‘Amex’) of nil (2009: US$72.9 million) which were due to be separately restructured in line with MRA terms agreed by EOL. The Amex loan was repaid during the year.

Borrowings from banks and financial institutions are generally secured pari passu with other lenders of the borrowing company with a first charge on property, plant and equipment, followed by charges over current assets and pledges of certain equity shares in subsidiaries held by the Group. Working capital loans are secured by a first charge on the current assets and a second charge on property, plant and equipment.

Interest rates on Indian Rupee borrowings range from 8.0% to 14.5% per annum (2009: 8.0% to 14.5%) while the interest rate on borrowings in other currencies ranges from 0.9% to 3.3% per annum (2009: 1.0 % to 7.0%).

The Group has undrawn committed facilities as at 31 December 2010 of US$4,046.1 million (2009: US$2,487.1 million) with maturities ranging from 1 to 2 years. Details of the maturity and interest profile of the Group’s borrowings are included in Note 23.

Optionally Cumulative Redeemable preference SharesOptionally Convertible Cumulative Redeemable Preference Shares (‘OCCRPS’) of a nominal value Rs. 3,500 million (US$68.2 million) were issued on 18 March 2009 by Essar Power Limited (‘EPOL’), a subsidiary of the Group. The OCCRPS carry interest rate of 0.1% and 8.0% per annum for the first two years and subsequent five years, respectively. The OCCRPS are convertible into equity shares at the option of the investor in the event of a covenant default or an IPO of Essar Power Limited. The conversion price will be determined based on the equity valuation of the subsidiary at the time of conversion. If there is no Qualified offering of EPOL, until the final redemption date, then the Preference shares will be redeemed at 14.5% to 20.5% interest per annum at the end of the original term based on valuation of EPOL. The Group has accounted the OCCRPS at amortised cost with effective interest rate of 20.8%.


18. borrowings continuedEPOL has also issued a warrant to the OCCRPS holder for a consideration of Rs. 100, which entitles the holder to subscribe to the equivalent of US$15.0 million of equity shares in EPOL at any time before an IPO of EPOL at an exercise price based on a predetermined valuation of EPOL. The OCCRPS continues to be held as long term borrowings. Refer to Note 20 for further information on the valuation of the warrant provided to the OCCRPS holder.

working Capital loansThe Group has a number of working capital loans which are used in the ordinary course of business which are subject to interest rates ranging from 1.0% to 13.75% per annum (2009: 1.0% to 12.25%) and are short term in nature.

bills of exchangeBills of exchange are accepted by banks towards payment of customer invoices and typically carry an interest rate ranging from 8.9% to 9.0% per annum (2009: 6.0% to 12.0%) and are settled in a period ranging from 7 to 21 days.

Loans from related partiesThe Group has entered into loan agreements with companies within the EGL group. The loans carry a range of interest from 9.5% to 12.25% per annum (2009: 0% to 10.25%) on the outstanding loan balance. Amount repayable to related parties of the Group carry a range of interest from 9.5% to 10.25% (2009: 0% to 10.25%) per annum on the outstanding loan balance (for further details, refer to Note 28).

An analysis of movement in net debt (including current and non-current) is presented in Note 23.

19. trade and other payables19a. trade and other payables (current)


$ million2009

$ million

Trade creditors1 1,536.3 2,223.1

Accrued expenses 11.3 8.9

Accrued employee cost 8.5 5.7

Due to related parties (Note 28) 184.4 137.7

Security deposits 2.1 2.0

Liability towards acquisition of non-controlling interest2 98.2 –

Other current payable 86.4 56.4

Advances from customers 6.4 65.7

Financial guarantee obligations 4.5 4.6

Deferred purchase consideration 19.0 –

Tax payable 23.1 8.0

total current trade and other payables 1,980.2 2,512.1

1 Trade creditors include bills of exchange accepted by the Group which are payable within 180–365 days of US$18.7 million (2009: US$518.6 million) which carry interest ranging from 6.0% to 18.0%. Other trade creditors are not interest bearing and are normally settled within 60 to 90 days.

2 The liability of US$98.2 million (2009: nil) reflects amounts payable in respect of a share purchase agreement signed in April 2010 between the Group and Essar Steel Limited, a related party, to purchase the entire non-controlling interest of 26% in EPOL (refer to Note 28).

19b. trade and other payables (non-current)


$ million2009

$ million

Trade creditors1 578.9 –

Security deposits 0.5 0.4

Due to related party (Note 28) 136.0 0.5

Deferred sales tax liability 224.0 122.1

Others 58.8 7.7

total non-current trade and other payables 998.2 130.7

1 Trade creditors includes bills of exchange accepted by the Group of US$560.7 million (2009: nil) which are convertible, at the discretion of the Group, to long term loan facility under existing agreements with banks and financial institutions and carry interest ranging from 6% to 18%.

The Group operates a defined benefit scheme for its employees. The net liability associated with the scheme is US$0.9 million (2009: US$0.4 million) included above.



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20. Derivatives20a. Derivative financial assets (current)


$ million2009

$ million

Commodity swaps 0.8 5.3

Commodity options – 1.6

Currency forward contracts 1.3 –

total derivative financial assets (current) 2.1 6.9

20b. Derivatives financial liabilities (current)


$ million2009

$ million

Commodity swaps 6.2 2.2

Warrants (Note 18) 3.3 –

Interest rate swaps 3.9 –

Currency swaps 2.8 –

Currency forward contracts 14.8 10.1

total derivatives financial liabilities (current) 31.0 12.3

The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, a discounted cash flow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Commodity swaps are measured using a forward curve based on quoted futures or forward prices and yield curves derived from quoted interest rates matching maturities of the contracts. Commodity options are measured using the same data as the commodity swaps, but also uses a volatility surface derived from quoted option volatilities interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates. No derivatives are designated as hedges for the purposes of financial reporting. Warrants provided to the holder of the OCCRPS were valued through use of a binomial model by reference to forecast performance of the underlying assets.

The principal amount in respect of interest rate swaps held at 31 December 2010 was US$99.5 million carrying an interest rate of 3.0%.

21. Invested capital


$ million2009

$ million

Opening balance 2,301.7 2,193.0

Capital contribution from Parent 625.7 108.7

Issue of shares to Parent (1,491.1) –

Transfer to other reserves (1,436.3) –

Closing balance – 2,301.7

The share capital and share application money of the Refining and Marketing, Exploration and Production and Power businesses was combined and reflected in invested capital. The Energy and Power Groups were acquired by EGL during 2006 and therefore their capital is initially brought into the consolidated financial statements as acquisitions.

Capital contribution represents further capital and share application money invested by EGL in Essar Energy Holdings Limited and Essar Power Holdings Limited.

Issues of shares to Parent represents share issued by the Company to EGL against share application money invested by EGL in Essar Energy Holdings Limited and Essar Power Holdings Limited.

The transfer to other reserve reflects the gifts of shares in Essar Energy Holdings Limited and Essar Power Holdings Limited by EGL to the Company.


22. Share capital


$ million2009

$ million

Allotted and fully paid share capital of the Company1,303,437,293 ordinary share of 5 pence per share 99.0 –

Since the Company was formed it issued 1,000,000,000 fully paid shares to its Parent Company for a total of US$1,491.1 million and issued 303,030,302 fully paid shares at a price of £4.20 in an initial public offering on 7 May 2010 with a further related over-allotment option issue of 406,991 shares of £4.20 on 4 June 2010.

number

Issue of shares on incorporation of £1 per share 1

Ordinary shares of £1 per share at 1 January 2010 1Impact of shares split from £1 per share to 5 pence share 19

Issues of shares to Parent 999,999,980

Issues of shares on IPO 303,437,293

Ordinary shares of 5 pence per share at 31 December 2010 1,303,437,293

23. financial risk management objectives and policiesThe Group’s principal financial liabilities, other than derivatives, comprise loans and overdrafts, debentures, finance leases and trade payables. The main purpose of these financial liabilities is to raise finance for the Group’s operations. The Group has various financial assets such as trade receivables, cash, and short term deposits, which arise directly from its operations.

The Group is subject to fluctuations in commodity prices and currency exchange rates due to nature of its operations. The Group enters into derivative transactions, primarily in the nature of commodity option and swap contracts and forward currency contracts. The purpose is to manage commodity price risk and currency risks arising from the Group’s operations.

The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, foreign currency risk, commodity price risk and credit risk. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below.

Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long term debt obligations with floating interest rates. The Group’s policy is to manage its interest cost using a mix of fixed and floating rate debts.

The following table provides a breakdown of the Group’s fixed and floating rate borrowings:


$ million2009

$ million

Fixed rate borrowings 3,463.8 2,693.8

Floating rate borrowings 1,033.8 415.2

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, being a 0.5% increase or decrease in interest rate, with all other variables held constant, of the Group’s profit before tax due to the impact on floating rate borrowings.


$ million2009

$ million

Effect on profit before tax:

LIBOR1 – decrease by 50 bps 3.0 1.4

PLR2 – decrease by 50 bps 1.6 0.7

1 London Inter-Bank Offer Rate (‘LIBOR’)2 Prime Lending Rate (‘PLR’), set by individual Indian banks in respect of their loans.

The impact of a 50 bps increase in interest rates on profit before tax will be as disclosed above with the exception that gains would be converted to losses.



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23. financial risk management objectives and policies continuedforeign currency riskThe Group has significant investments and operations in India. Accordingly, its financial state of affairs can be affected significantly by movements in the Rs/US dollar exchange rates.

The Group also has transactional currency exposures. Such exposure arises from sales or purchases by an operating unit in currencies other than the unit’s functional currency. Foreign currency swaps, options and forward contracts are used to mitigate the risk arising from fluctuations in foreign exchange rates.

The carrying amounts of the Group’s financial assets and liabilities denominated in different currencies are as follows:

2010 2009

As at 31 December

financial assets

$ million

financial liabilities $ million

Financial assets

$ million

Financial liabilities $ million

Indian rupees 1,792.8 4,447.9 1,254.2 3,164.4

United States dollar 638.8 2,733.9 119.8 2,315.4

Canadian dollars 19.5 185.8 12.7 191.4

Euro – 75.5 2.0 1.3

Great Britain pound 50.9 1.3 0.1 0.1

Others 2.0 4.9 – –

2,504.0 7,449.3 1,388.8 5,672.6

The Group’s exposure to foreign currency arises in part where a Group company holds financial assets and liabilities denominated in a currency different from the functional currency of that entity with US dollar being the major non-functional currency of the Group’s main operating subsidiaries. Set out below is the impact of a 10% movement in the US dollar on profit before tax arising as a result of the revaluation of the Group’s foreign currency financial assets and liabilities:

As at 31 December 2010

$ million2009

$ million

Effect of 10% strengthening of US$ against Rs on profit before tax (185.0) (80.3)

The Group enters into forward foreign exchange contracts to cover foreign currency payments and receipts. The Group also enters into forward foreign exchange contracts to manage the risk associated with anticipated sales and purchase transactions.

The Group has taken forward cover of US$910.5 million (2009: US$1,377.3 million) to hedge against currency risk against movement in Rs/US dollar.

The impact of a 10% weakening of the US dollar on profit before tax will be the same as disclosed above except that losses would be converted to gains.

Credit riskThe Group is exposed to credit risk in the event of non-payment by customers. The Group is also exposed to credit risk from trade receivables, dues from related parties, term deposits, liquid investments and other financial instruments.

The Group trades with recognised and creditworthy third parties. Cash, liquid investments and term deposits are held and derivatives are dealt with in banks either international or domestic with high credit ratings reflecting the needs of the Group to operate in territories where international credit ratings are limited by the credit rating of the relevant territory. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis. For transactions that do not occur in the country of the relevant operating unit, the Group does not offer credit terms without the approval of the appropriate authority. The Group does not consider there to be any significant credit risks in respect related parties.

The Group is exposed to credit risk in the event of non-payment by customers. The Group establishes an allowance for doubtful accounts that represents its estimate of incurred losses in respect of trade and other receivables. Trade receivables disclosed above include amounts (see below for aged analysis) which are past due at the reporting date but against which the Group has not recognised an allowance for doubtful receivables because there has not been a significant change in credit quality and the amounts are still considered recoverable. No allowance for doubtful has been made in the accounts as at 31 December 2010 and 2009. None of those trade debtors past due or impaired have had their terms renegotiated. The maximum exposure to credit risk at the reporting date is the fair value of each class of debtors presented in the financial statement. The Group does not hold any collateral or other credit enhancements over balances with third parties nor does it have a legal right of offset against any amounts owed by the Group to the counterparty.

The Group has assigned certain amounts in respect of its sales tax obligations to a related party which has been guaranteed by a counter party as described in Note 28.


23. financial risk management objectives and policies continuedAgeing of past due but not impaired receivables is as follows:


$ million2009

$ million

0-30 days 37.0 14.9

30-60 days 11.1 9.4

60-90 days 13.2 10.2

90-120 days 12.1 13.6

120-365 days 90.4 70.7

1-5 years 31.6 –

5 years plus 22.4 20.9

total 217.8 139.7

The aged receivables include US$158.5 million (2009: US$118.8 million) in respect of amounts billed for supply of power to GUVNL. Payments on ordinary ongoing billings are received from GUVNL regularly and are off set against amounts due. Overdue amounts which are five years or greater are in relation to amounts due for construction activities performed which the Group have been successful in securing award of payment through arbitration proceedings. The awards have since been challenged by the counterparties. The amounts have not been provided for on the basis of the arbitration awards in favour of the Group.

Liquidity riskGroup companies monitor their risk of shortage of funds using cash flow forecasting models. These models consider the maturity of their financial investments, committed funding and projected cash flows from operations.

The Group’s objective is to provide financial resources to meet its business objectives in a timely, cost effective and reliable manner and to manage its capital structure in line with its two internal debt protection ratios. A balance between continuity of funding and flexibility is maintained through the use of bank loans, debentures, preference shares and finance leases. Out of the Group’s liabilities, 27.4% will mature in less than one year (2009: 42.5%). The maturity profile of the Group’s recognised financial liabilities on a gross basis is given in the table below:


weighted average

effective interest

rate %

<1yr $ million

1-5 yrs $ million

>5 yrs $ million

total $ million

Borrowings 8.6 969.3 2,817.7 2,936.2 6,723.2 Trade and other payables 1,893.1 352.1 1,371.8 3,617.0 Derivatives 27.7 – – 27.7 Finance lease payables (Note 27b) 12.4 11.9 16.1 11.9 39.9 Financial guarantee contracts 4.5 – – 4.5

2,906.5 3,185.9 4,319.9 10,412.3


Weighted average effective interest

rate %

<1yr $ million

1-5 yrs $ million

>5 yrs $ million

Total $ million

Borrowings 8.2 1,275.5 2,611.8 1,760.9 5,648.2

Trade and other payables 2,383.3 8.2 553.5 2,945.0

Derivatives 12.3 – – 12.3

Finance lease payables (Note 27b) 11.9 12.1 23.7 14.6 50.4

Financial guarantee contracts 4.6 – – 4.6

3,687.8 2,643.7 2,329.0 8,660.5

The majority of the Group’s derivative financial instruments mature within 12 months of each reporting end. The undiscounted cash flows in respect of derivative financial instruments are US$1,086.1 million (2009: US$1,317.6 million). Note where the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves existing at the reporting date.



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23. financial risk management objectives and policies continuedCommodity price riskThe prices of refined petroleum products and crude oil are linked to the international prices. The Group’s revenues, costs and inventories are exposed to the risk of fluctuation in prices of crude oil and petroleum products in the international markets. From time to time, the Group uses commodity derivative instruments to hedge the price risk of forecasted transactions such as forecast crude oil purchases and refined product sales. These derivative instruments are considered economic hedges for which changes in their fair value are recorded in the consolidated income statement.

The Group operates a risk management desk that uses hedging instruments to seek to reduce the impact of market volatility in crude oil and product prices on the Group’s profitability. To this end, the Group’s risk management desk uses a range of conventional oil price-related financial and commodity derivative instruments such as futures, swaps and options that are available in the commodity derivative markets. The derivative instruments used for hedging purposes typically do not expose the Group to market risk because the change in their market value is usually offset by an equal and opposite change in the market value of the underlying asset, liability or transaction being hedged. The Group’s open positions in commodity derivative instruments are monitored and managed on a daily basis to ensure compliance with its stated risk management policy which has been approved by the management.

Set out below is the impact of 10% increase or decrease in base crude and petroleum product prices on profit before tax as a result of change in value of the Group’s commodity derivative instruments:


$ million2009

$ million

Effect of 10% increase in prices on profit before tax

Crude Oil (11.2) (10.3)

Crack (0.1) (0.7)

Effect of 10% decrease in prices on profit before tax

Crude Oil 11.2 9.2

Crack 0.1 0.7

Crack refers to the difference between the per barrel price of petroleum products and related cost of crude oil used for their production.

Capital managementThe Group’s objectives while managing capital are to safeguard its ability to continue as a going concern and to provide adequate returns for its shareholders and benefits for other stakeholders. The Group’s policy is generally to optimise borrowings at an operating company level within an acceptable level of debt. Equity funding for existing operations or new acquisitions is raised centrally, first from excess cash and then from new borrowings while retaining on an acceptable level of debt for the consolidated Group. The Group’s policy is to borrow using a mixture of long term and short term debts from both local and international financial markets together with operating cash generated to meet anticipated funding requirements.

The Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. The Group includes within net debt, interest bearing loans and borrowings less cash and cash equivalents, short term and long term deposits. Total Equity includes equity attributable to the equity holders of the Group as well as non-controlling interest.


$ million2009

$ million

Interest-bearing loans and borrowings 4,497.6 3,109.0

Less: cash and cash equivalents 563.7 71.4

net debt 3,933.9 3,037.6

Total Equity 4,642.1 2,038.8

equity and net debt 8,576.0 5,076.4

Gearing ratio 45.9% 59.8%


23. financial risk management objectives and policies continuedMovements in net debt

Cash and cash

equivalents $ million

Debt due within one

year $ million

Debt due after one

year $ million

total $ million

balance as at 1 January 2010 71.4 (918.9) (2,190.1) (3,037.6)Proceeds from borrowings – (328.5) (1,723.1) (2,051.6)

Repayment of borrowings – 713.3 195.8 909.1

Movement in bills of exchange and other financing – (29.5) – (29.5)

Net increase in cash and cash equivalent 453.8 – – 453.8

Arrangement fees for undrawn facility – – (50.0) (50.0)

Accrued interest – – (39.6) (39.6)

Change in maturity – (144.5) (144.5) –

Exchange and other differences 38.5 (41.9) (85.1) (88.5)

Closing balance as at 31 December 2010 563.7 (750.0) (3,747.6) (3,933.9)

24. financial instrumentsThe accounting classification of each category of financial instruments and their carrying amounts has been tabulated below:

Carrying amount


$ million2009

$ million

financial assetsAt fvtpL– Held for trading (derivatives) 2.1 6.9

Cash and cash equivalents 563.7 71.4

Loan and receivables– Trade and other receivables 1,371.9 958.1

– Other financial assets 566.3 311.1

AfS investments – 41.3

2,504.0 1,388.8

financial liabilitiesAt fvtpL– Held for trading (derivatives) 31.0 12.3

At amortised cost– Borrowings 4,497.6 3,109.0

– Trade and other payables 2,890.5 2,513.6

– Finance lease payables 25.7 33.1

financial guarantee contracts 4.5 4.6

total 7,449.3 5,672.6

The fair value of the financial assets and liabilities are estimated at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Other than fair value of derivatives set out in Note 20, the following methods and assumptions were used to estimate the fair values:

cash and short term deposits, trade and other receivables, trade and other payables, and other current liabilities approximate ¸¸

their carrying amounts largely due to the short term maturities or nature of these instruments.the fair value of listed investments is determined by reference to market price at the close of business on the balance sheet date. ¸¸

The fair value of unlisted investments held by the Group is estimated with reference to the net assets of the underlying businesses at each reporting date. the fair value of loans from banks and other financial indebtedness as well as other non-current financial liabilities is estimated by ¸¸

discounting future cash flows using rates currently available for debt or similar terms and remaining maturities. The discounting rate ranges from 11.25% to 12.00%.

The Group financial assets and liabilities that are measured subsequent to initial recognition at fair value are derivatives (Note 20) and AFS investments (Note 13). Derivative financial assets and liabilities are classified as Level 2 fair value measurements, as defined by IFRS 7, being those derived from inputs other than quoted prices that are observable for the assets or liability, either directly (i.e. price) or indirectly (i.e. derived from prices). AFS investments are classified as Level 3 fair value measurements, as assets held are unquoted. There were no transfers between categories throughout the periods presented. The carrying value of all other financial assets and liabilities closely approximate their fair value except for borrowings (Note 18) where fair values are estimated to be US$4,295.7 million (2009: US$3,004.1 million).



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25. business combinations25a. Acquisition of navbharat power private LimitedOn 12 July 2010, Essar Energy, through its subsidiary EPOL, entered in to a binding agreement for the acquisition of a 100% interest in Navabharat Power Private Limited (‘NPPL’) for a consideration of US$50.2 million. EPOL initially acquired a 76% interest for a cash consideration of US$31.2 million with the balance to be acquired upon completion of certain project milestones. After acquisition, the Group also infused further project equity of US$21.6 million. The transaction was treated as a 100% acquisition on 12 July 2010, as the most significant condition for its completion in respect of obtaining project financing was satisfied with remaining project milestones being procedural in nature.

NPPL is a 2,250 MW coal-fuelled power plant under construction in Orissa, India. The project is estimated to cost a total of US$2.0 billion and is being implemented in two phases. The first and second phase are expected to provide capacities of 1,050 MW and 1,200 MW, respectively. Prior to the acquisition, NPPL had already obtained certain key regulatory approvals for the construction project including those in respect of environmental and forest clearance from the Ministry of Environment and Forests. By virtue of the acquisition, Group has obtained a 17.39% interest in the allocation of the Rampia coal block of 112 million tonnes and a 4.7 mmt per annum coal linkage with Coal India Limited.

The Group has accounted for the acquisition of NPPL as a business combination using the purchase method. The fair value of the identifiable assets and liabilities of NPPL as at the date of acquisition and the corresponding carrying amounts immediately before the acquisition was as follows:

Book value $ million

Fair value adjustments

$ millionFair value

$ million

AssetsProperty, plant and equipment 4.0 69.4 73.4

Investment in joint controlled entity 0.2 – 0.2

Trade and other receivables 1.1 – 1.1

total assets acquired 5.3 69.4 74.7

Liabilities

Trade and other payables 1.4 – 1.4

Deferred tax liabilities – 23.1 23.1

total liabilities assumed 1.4 23.1 24.5

net assets 3.9 46.3 50.2

Share in net assets 50.2Cost of acquisition 50.2

NPPL did not have any significant trading results in 2010.

25b. Acquisition of pt bara pratama Indonesia (‘pt bpI’) On April 13, 2010, Essar Energy through its subsidiary Essar Minerals FZE acquired a 99.96% voting interest in PT BPI. PT BPI holds a 99.99% stake in PT Manoor Bulatn Lestri which own the exploitation license for a coal mine in West Kutai (East Kalimantan) Indonesia (the ‘Aries coal mine’).

The mine has an area of 5,000 Ha and JORC compliant reserves of approx. 64 mmt with appropriate environmental approvals in place. The process for obtaining the necessary forest approvals is currently in progress.

The Group has accounted for the above transaction as an asset acquisition. The consideration paid in cash for the acquisition of PTBPI and PT MBL was US$118.0 million which has been recorded as an addition in the period within property, plant and equipment.

25c. Acquisition of essar Recursos Minerals Mozambique Limitada (‘eRMML’)Essar Energy acquired ERMML from Essar Minerals Limited, its fellow subsidiary within the EGL group, in April 2010 for a cash consideration of US$29.9 million. The transaction was deemed to be at arm’s length.

ERMML holds a coal licence in the Cambulatsitsi, Mozambique and the mine is estimated to have coal resources of approximately 35 mmt. Essar Energy has accounted for the above transaction as an asset acquisition with the total consideration being included as an addition in the period within property, plant and equipment.


26. Interest in joint controlled entitiesThe Group acquired a 50% interest in Kenya Petroleum Refinery Limited (‘KPRL’), a joint controlled entity in July 2009. The value of assets and liabilities of KPRL as at the acquisition date were as follows:

$ million

Share of joint

controlled entities

$ million

Current assets 43.3 21.7

Non-current assets 44.6 22.3

Current liabilities (27.0) (13.5)

Non-current liabilities (7.1) (3.6)

net assets 53.8 26.9

Share in net assets 26.9

Cost of acquisition 7.8

Surplus on acquisition (note 7) 19.1

The Group’s joint controlled entities are as follows:

Name of the entityCountry of

incorporation

Date of joint venture relationships

% Voting held by the Group

Economic % held by the Group

2010 2009 2010 2009

Mahan Coal Limited (MCL) India 13/09/2006 50.0 50.0 37.0 33.1

Rampia Coal Mines and Energy Private Limited (Rampia) India 12/07/2010 17.4 – 12.4 –

Kenya Petroleum Refinery Limited (KPRL) Kenya 31/07/2009 50.0 50.0 50.0 50.0

The share of revenue, profit, assets and liabilities of the joint controlled entities are as follows:

for the year ended 31 December 2010

Share of joint

controlled entities’

results $ million

Revenue 17.0 Profits 1.7

For the year ended 31 December 2009

Share of joint

controlled entities’ results

$ million

Revenue 6.8

Profits 0.7


$ million2009

$ million

Current assets 22.5 22.3

Non-current assets 24.7 23.8

Current liabilities (11.6) (13.0)

Non-current liabilities (3.3) (4.1)

32.3 29.0

Further Group’s share in contingent liabilities and capital commitment of joint controlled entities are as follows:


$ million2009

$ million

Contingent liabilities 13.4 3.6

Capital commitments 0.4 0.1

13.8 3.7



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27. Contingencies, commitments and guarantees27a. ContingenciesContingent liabilitiesContingent liabilities at the balance sheet date, not otherwise provided for in the consolidated financial statements are categorised as follows:


$ million2009

$ million

Claims 33.0 23.9

Interest payable1 119.0 73.3

Bank guarantees 169.8 98.5

Disputed custom duty 16.0 17.0

Disputed income and indirect tax 16.1 11.8

Others 13.7 48.6

total 367.6 273.1

1 The Group has assumed that certain facilities will be paid at the earliest redemption date, subject to lenders confirmation and thus interest charge has been based on applicable early redemption rates. This amount represents the cumulative additional interest that would have been charged to the income statement in the period if the related debt would not be prepaid at the earliest redemption date. Any additional interest payable in the future is secured by a first charge on the current assets and a second charge on property, plant and equipment.

Contingent liabilities relate predominantly to actual or potential litigation of the Group for which amounts are reasonably assessable but the liability is not probable and therefore the Group has not provided for such amounts in this consolidated financial statements. The amounts relate to a number of actions against the Group, none of which are individually significant. Additionally, there are a number of legal claims or potential claims against the Group, the outcome of which cannot be foreseen at present, and for which no amounts have been included in the table above.

Sales tax benefitIn relation to benefits under the Sales Tax Incentive Scheme, there is an ongoing dispute surrounding the eligibility of EOL to qualify for the Sales Tax Incentive Scheme. An order was issued by the Honourable High Court of Gujarat on 22 April 2008, which confirmed, amongst other things, that EOL is eligible for the Sales Tax Incentive Scheme. Subsequently the State Government of Gujarat filed a Special Leave Petition in the Honourable Supreme Court, challenging the order of the Honourable High Court. The case has not yet been heard by the Honourable Supreme Court but the Group believes it has a high likelihood of success.

In order to qualify for the Sales Tax Incentive Scheme, various conditions must be met including ensuring certain percentages of employees are local, re-investing certain amounts of the benefit, adhering to specified pollution control measures and also contributing a certain amount to prescribed rural development scheme in the State of Gujarat by the Group over a period estimated to be up to 17 years to ensure that the full benefit of the sales tax deferral which has been recorded can be retained by the Group.

In the event that such conditions are not met, the payment of sales tax including interest to the State of Gujarat will be accelerated, and there will be an accounting charge to reflect the fact that the liability is discounted. As a consequence, there may be an additional potential liability resulting from a breach of financial covenants as stipulated under the MRA of EOL. Management believes there is a high likelihood that these conditions will be met.

As of 31 December 2010, the Group has collected and retained an amount of US$950.6 million (2009: US$553.5 million) with the cumulative effect of discounting (net of the effect of unwinding) being US$698.2 million (2009: US$413.4 million).

Claim by customer On 14 September 2005, GUVNL, an entity controlled by the State of Gujarat, filed a petition against EPOL with the Gujarat Electricity Regulatory Commission (the ‘GERC’) alleging that EPOL diverted electricity generated by its Hazira power plant to Essar Steel, a related party, in violation of its power purchase agreement (‘PPA’) with the Gujarat Electricity Board, whose assets and liabilities were transferred to GUVNL in 2003 and incorrectly claimed certain fuel generation credits from GUVNL between 1996 and 2006. GUVNL claimed a total of approximately US$353.3 million (2009: US$339.1 million) from the Group.

On 18 February 2009, the GERC ruled in favour of GUVNL for the diversion of electricity by EPOL. The GERC also awarded GUVNL a refund for generation incentives incorrectly claimed from 14 September 2002 to 29 May 2006. The GERC, however, ruled that recovery of the incorrectly claimed generation incentives and of compensation for the electricity supplied to Essar Steel Limited in breach of the PPA prior to September 2002 was barred by the applicable statute of limitation.

Both EPOL and GUVNL appealed the GERC’s ruling to the Appellate Tribunal for Electricity, New Delhi. The Appellate Tribunal held on 22 February 2010 that EPOL was not liable to pay compensation for alleged wrongful diversion of power to Essar Steel or for the reimbursement of the annual fixed charges. The Appellate Tribunal further held that EPOL was liable to refund to GUVNL the deemed generation incentive paid on and after 14 September 2002 which the Group had already provided for.

On 29 January 2010, EPOL filed a petition before the GERC against GUVNL claiming certain payments due to it under the PPA. EPOL has made a claim for an aggregate amount of US$87.8 million (2009: US$84.4 million) comprising delayed payment charges, depreciation, foreign exchange variation, interest on debentures, bill discounting charges, interest on working capital and alleged wrongful deduction of rebate by GUVNL. The matter is pending before the GERC.


27. Contingencies, commitments and guarantees continuedIn respect of the outstanding claims, the Group does not expect to incur costs or loss in excess of amounts provided in defending its position and recovering its dues.

In April 2010, GUVNL filed two separate appeals before the Supreme Court against the common judgement of the Appellate Tribunal for stay of the implementation of the order of the Appellate Tribunal. The Group has filed caveats against the stay to oppose admission of the appeals as well as the grants of stay. The case was heard in May 2010 and after hearing the arguments from both parties, the court directed to file written submissions. The written submissions have been filed by both parties. Hearing on the admission of the appeal is expected shortly.

Other claims There are a number of other claims in connection with the Group. However management believes that the probability of future liabilities in respect of such claims is remote and no amounts have been provided or disclosed as contingent liabilities over the periods presented.

Contingent assetsIn June 1998, a cyclone hit the west coast of India which caused extensive damages to the refinery site leading to delays in the construction and completion of the refinery. The insurance company and the Company have since decided to settle the claim by arbitration. The Company had filed an initial claim of US$674.0 million (2009: US$647.0 million) before the arbitration panel covering loss of profit, material damage and interest. During the arbitration proceedings, the Company had revised its claim. The arbitration proceedings are currently at an advanced stage. Pending the outcome of arbitration, the claim amount is not recognised in the financial statements.

27b. Commitments Finance lease – the Group as lesseeThe Group has finance leases in respect of certain buildings as well as plant and machinery. Such leases have terms of renewal without any purchase options or escalation clauses. Renewals are at the option of the specific entity that holds the lease. Future minimum lease payments under finance leases and hire purchase contracts together with the present value of the net minimum lease payments are as follows:

Minimum lease payments

Present value of minimum lease payments


$ million2009

$ million2010

$ million2009

$ million

Payable less than 1 year 11.9 12.1 10.8 10.4

Payable later than 1 year and not later than 5 years 16.1 23.7 11.6 18.5

Payable later than 5 years 11.9 14.6 3.3 4.2

total 39.9 50.4 25.7 33.1

Less: Future finance charges (14.2) (17.3)

Present value of minimum lease payments 25.7 33.1

Capital commitmentsThe Group has capital commitments of US$6,489.7 million (2009: US$6,877.2 million) in respect of contracts entered into for which works are ongoing. Of the outstanding capital commitments at 31 December 2010 US$2,484.2 million are expected to crystallise within one year.

Export obligationsThe Group imports capital goods under the Export Promotion Capital Goods Scheme and raw materials under the Advance License Scheme to utilise the benefit of a zero or concessional customs duty rate. These benefits are subject to future incremental exports by the Group within the stipulated period. The Group has following outstanding export obligations:


$ million2009

$ million

Export obligations 1,334.4 582.7

Based on past performance, market conditions and business plans, the management expects to fulfil the incremental export obligation within the stipulated period. The expiry of export obligations is as follows:


$ million2009

$ million

Due in later than 1 year and not more than 5 years 553.2 79.9

Due in more than 5 years 781.2 502.8

1,334.4 582.7

27c. Corporate guaranteesThe Group has provided a number of guarantees in respect of companies outside of the Group to third party lenders that were entered into prior to IPO and amount to US$151.0 million (2009: US$61.8 million).



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27. Contingencies, commitments and guarantees continuedAny potential losses incurred in the future by the Group of up to US$197.0 million in respect of these guarantees are indemnified by EGL.

The majority of guarantees provided have been treated as insurance contracts in line with the Group’s accounting policies.

28. Related partiesThe Group, as discussed in Note 1, is part of the wider group of companies controlled by EGL and its controlling shareholders and as a result has entered into a number of transactions with other wider Essar group entities (the ‘Essar Group’). The Group shares many functions and services that are performed by various members of the Essar Group for which costs are allocated across the relevant benefiting entities which have benefited. The costs have been historically allocated on a basis which the Essar Group believes is a reasonable reflection of the utilisation of each service provided or the benefit received by each Essar Group company. The allocated costs, while reasonable, may not necessarily be indicative of the costs that would have been incurred by the Company if it had performed these functions or received these services as a stand-alone entity.

The Company and EGL entered into a Relationship Agreement, the principal purpose of which was to ensure that following listing, the Group was capable of carrying on its business independently of EGL and its associates.

Balances and transactions between entities within the Group, which are related parties, have been eliminated and are not disclosed in this note.

28a. transactions with parent CompanyEGL is the ultimate parent company of the Group throughout the financial period. The ultimate controlling entities of EGL are the Virgo and Triton Trusts, whose beneficiaries include, among others, companies, whose controlling shareholders are Mr Ravi Ruia and Mr Prashant Ruia.

The Group’s balances outstanding with EGL are as follows:

for the year ended 31 DecemberOutstanding balances

2010 $ million

2009 $ million

Trade and other receivables – 15.0

Trade and other payables – 2.5

EGL has also provided guarantees to third party lenders in respect of the Group amounting to US$3,173.4 million (2009: US$749.8 million).

No significant transactions have occurred with EGL during the periods presented, except those which formed the Group as described in Note 1 and those set out above.

28b. transactions with entities in the essar Group (excluding the parent Company)The Group has undertaken transactions and has outstanding balances with Essar Group affiliates as follows:

for the year ended 31 Decembertransactions with essar Group companies

2010 $ million

2009 $ million

Sale of goods and services 193.9 144.4

Purchases of goods and services 224.5 245.1

Interest income 18.9 6.4

Interest expense 15.6 7.1

Purchase of investment – 0.1

Purchases of property, plant and equipment 1,967.7 161.0

Sale of investment 33.2 3.7

Sale of property, plant and equipment – (0.3)

As at 31 Decemberbalances with essar Group companies

2010 $ million

2009 $ million

Trade and other receivables

– current 182.6 65.9

– non-current 293.2 124.5

Amounts due for capital work in progress 534.7 158.5

Trade and other payables

– current 184.4 135.2

– non-current 136.0 0.5

Loans payable – current – 97.8

Loans payable – non-current 213.9 –

Finance lease payable 14.5 14.9


28. Related parties continuedCertain related parties have provided guarantees to third party lenders in respect of the Group amounting to US$2,747.6 million (2009: US$2,383.5 million). The Group has also provided guarantees in respect of borrowings of certain related parties amounting to US$65.5 million (2009: US$58.7 million). Any potential losses incurred in the future by the Group in respect of guarantees given on behalf of related parties are indemnified by EGL.

28c. transactions with joint controlled entities On 31 July 2009, the Group acquired 50% joint control of KPRL (Note 26). During the year, the Group sold goods of US$1.7 million (2009: nil) to KPRL and no balances are outstanding. During the period, the Group invested a further a sum of US$2.0 million (2009: US$1.0 million) in KPRL.

28d. terms and conditions of transactions with related partiesThe sales to and purchases from related parties are made on contractually agreed prices. Outstanding balances at the year end are unsecured and bear interest at rates ranging from 9.5% to 10.25%. The Group has not recorded any impairment of receivables due from related parties. An assessment for impairment of related party receivables is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.

28e. Related party contractsEGL and companies in the Essar Group are party to a significant number of arrangements with the Group. The Group is reliant on the Essar Group for a number of ongoing, and in some cases, long term, arrangements including customer and supply contracts, transport and logistics services, construction and other services in relation to the Expansion Projects and corporate and administrative services.

These arrangements between members of the Group and the Essar Group are summarised below.

Shared servicesThe Group leases office and other space from certain companies in the Essar Group.

In addition, the Group receives certain services from the Essar Group relating to accommodation, telecommunications infrastructure and internet connections, travel and related services (including management and maintenance services for aviation related activities, technical services and ground handling services), treasury functions, management consultancy, maintenance of greenbelt in respect of the Vadinar refinery, technical storage facilities, business centre facilities, managerial support and corporate functions including financial advice, legal advice, and advice on matters related to corporate governance, environmental management, risk and insurance, taxation, aircraft usage and related services, information technology services, payroll processing and other HR services and shared services for accounting activities.

The services are generally provided for a period of between three and seven years, terminable by either party on 30 to 180 days’ notice.

Intellectual property Certain members of the Group have been granted the right to use the ‘Essar’ name for the purposes of their corporate identities and for operating their businesses worldwide. The total amount payable by the Company under the licence agreement is approximately £1. The total amount payable by Essar Oil and Essar Power under their licence agreement is equal to 0.25% of each of their net revenues (i.e. exclusive of value added tax and excise duty in the case of Essar Power, and exclusive of taxes, duties and crude oil cost in the case of Essar Oil) generated by their respective business each quarter, with an increase of 0.15% every year over a period of 5 years until it reaches 1.0%. The Licensor has agreed to waive fees payable under these licence agreements for the period from 1 April 2010 to 31 March 2011.

power businessConstruction projects The Power business has a number of contracts with companies in the Essar Group in relation to onshore and offshore engineering, construction, procurement, transportation and project management services.

Power purchase agreementsThe Group has entered, and expects to enter into additional, long term PPAs with companies in the Essar Group.

Key contracts in respect of operational power plants include:a PPA expiring in 2026 with Essar Steel for the supply of power from the Essar Power-Hazira power plant to Essar Steel.¸¸

PPAs expiring in 2030 with a number of companies in the Essar Group for the supply of power from Bhander Power-Hazira ¸¸

power plant. PPAs expiring in 2029 with Essar Steel Algoma for the supply of all the power produced by the Essar Power Canada power ¸¸

plant.

Key contracts in connection with power plant projects not yet operational include a number of PPAs for the supply of power to Essar Steel and other companies in the Essar Group. These contracts are each for period of 25 years from the date of commencement of commercial operations of the plant to supply the power under the PPA. These power plant projects include the Essar Power MP-Mahan project, the Essar Power Hazira-Hazira project, the Essar Power Orissa-Paradip project and the Vadinar Power expansion projects. The Group has also issued a number of performance guarantees in favour of Essar Steel and other Essar Group companies in respect of its performance under the PPAs.



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28. Related parties continuedWater and fuel supply agreementsMembers of the Group are parties to a number of contracts with members of the Essar Group for the procurement, supply, management and handling of fuel and water needed to generate power.

Key contracts in connection with operational power plants include:the Group has a water and fuel management agreement with Essar Steel (to run concurrently with the Group’s PPA with Essar ¸¸

Steel) for the procurement and supply of fuel needed to generate the power that Essar Steel has committed to take from the Essar Power-Hazira power plant pursuant to its PPA; the Group has contracts with Essar Steel and other Essar Companies whereby those companies are responsible for providing ¸¸

the natural gas required by the Bhander Power Hazira plant, to generate the power that the Essar Group has committed to take pursuant to the respective PPAs; and the Group is party to a contract with Essar Steel Algoma (expiring in 2029 or such later date as agreed by the parties) pursuant ¸¸

to which surplus blast furnace gases and coke oven gas are supplied by Essar Steel Algoma to the Group in return for power and steam for use at Essar Steel Algoma’s steelworks.

Key contracts in connection with power plant projects not yet fully operational include:the Group has entered into a number of long term agreements (ranging from 20 to 25 years) for coal supply, coal handling ¸¸

and coal affreightment, to secure the supply of coal to the Essar Power Gujarat-Salaya power plant.the Group has entered in to a 25 year water and fuel supply agreement with Essar Steel Hazira for the Vadinar power plant ¸¸

expansion project.under certain agreement the Essar Group has an obligation to provide fuel and water for the power plants and projects ¸¸

at Orissa and Hazira.the Group has entered into a long term agreement for coal handling in respect of the Essar Power Vadinar Power ¸¸

expansion project.

Other arrangements Operations and maintenance agreement with Essar SteelThe Power business has agreed to provide operations and maintenance services to Essar Steel for the 25 MW power plant of Essar Steel located at Visakhapatnam for a term of 15 years from 1 July 2006 at cost plus profit margin of 15% which will increase by a growth rate of 6% on an annual basis.

LeasesA company within the Group has agreed to lease the site of the Essar Orissa-Paradip power plant from the Essar Group. The lease is for a period of 90 years. Rent payable under the lease will be determined by the parties at the time of execution of the lease.

Essar Power Hazira and Essar Power Transco have agreed to lease the site for their projects from the Essar Group.

Oil and gas businessExploration and ProductionThe Group has contracted with certain Essar Group companies for the hiring of drilling rig services, along with related equipment, personnel, instruments, materials, stores, accommodation and other services at its various exploration blocks. These expiry dates of these agreements range from 2012 to 2019.

The Group has also contracted with certain Essar Group companies for laying gas pipelines and for certain engineering and design services.

Refinery expansion projectsIn connection with the certain refinery projects, the Group has contracted with various Essar Group companies for engineering services, project management services, project construction, equipment transport and handling services, petroleum handling services, and the supply of equipment and bulk materials. Certain Essar Group companies are required to provide performance guarantees and corporate guarantees in favour of the Group in relation to each of the contracts for these services.

Shipping and logisticsThe Essar Group provides the Vadinar refinery with logistical services for transporting refined petroleum products by road from the refinery to various depots and other locations within India, where those products are ultimately sold. The contract relating to the provision of these services expires on 31 March 2017.

Petroleum handlingThe Group has a petroleum handling agreement with an Essar Group company expiring on 31 March 2014, under which the Essar Group provides services for the receipt, handling, storage and dispatch of the Group’s crude oil and intermediate and refined petroleum products. The agreement includes a minimum monthly charge. Further, under the terms of the agreement, the Group supplies all utilities to the Essar Group company, including power, water and steam, at no additional cost.

Maintenance and suppliesThe Group has contracted with certain Essar Group companies to provide maintenance services, including technical services and day to day maintenance to their facilities situated at the Vadinar refinery.


28. Related parties continuedLeasesThe Group leases the site of the Vadinar port terminal operations to an Essar Group company under a 30 year lease (due to expire in December 2035 and renewable by the Essar Group for a further 30 year period) at an annual rent of approximately Rs. 2.5 million (US$0.1 million).

The residential township and transit accommodation, used by employees and visitors of the Petroleum refinery, were leased by the Group for a period of 20 years at an annual rent of approximately Rs. 151.9 million (US$3.4 million) from a related party of the Essar Group. On expiry of the lease in 2027, the Group has an option to extend the lease under mutually agreed terms and conditions.

Sales tax liability assignmentThe Group receives certain sales tax incentives under the Capital Investment Incentive Premier/Prestigious Unit Scheme – 1995-2000. In connection with this arrangement, the Group has assigned its liability for the sales tax collected during the three years ended 31 December 2010 to a related party of the Essar Group and has paid the present value in relation to such liability to that entity. The Group has received a guarantee from an Essar Group company for the assigned amount.

Inter corporate depositsThe Group has entered into Inter Corporate Deposits contracts with an Essar Group company for Rs. 12,750 million (US$284.5 million) and the amount outstanding against these contracts including interest as of 31 December 2010 is Rs. 9,284.4 million (US$207.2 million).

28f. transactions in respect of the Group’s non-controlling stakeDuring 2010 the Group acquired an additional interest in EOL from a related party for a net cash outflow of US$52.4 million. Additionally, the Group also entered into agreements to purchase certain non-controlling stakes as described below:

Essar Power share purchase agreement Essar Power Holding Limited (‘EPH’) entered into a share purchase agreement, governed by Indian law, dated 6 April 2010 with Essar Steel Limited, a related party, pursuant to which Essar Steel Limited has agreed to transfer its shareholding of 217,000,000 equity shares, representing 26% of the issued equity share capital of Essar Power Limited to EPH for a consideration of Rs. 4.4 billion (US$98.2 million). Apart from customary conditions precedent, such as the receipt of all regulatory approvals in relation to the transfer, the transfer is subject to the commencement of commercial operations in Unit I of the Essar Power Gujarat—Salaya project, the Essar Power MP-Mahan project and Phase I and Phase II of the existing power plant of VPCL. This condition precedent may be waived by EPH at any time. The sale is also subject to EPH providing Essar Steel Limited an indemnity towards reimbursement of any cross subsidy surcharge payable by Essar Steel Limited under applicable law as a result of the transfer of its shareholding in Essar Power Limited. However, this requirement may be waived by Essar Steel Limited at its discretion. The transfer of Essar Steel Limited’s shareholding in Essar Power Limited to EPH is subject to applicable law and may not be given effect to in the event the conditions precedent are not satisfied or waived prior to 30 September 2011. Pending completion of such sale, Essar Steel has agreed that the exercise of its voting rights in respect of its shares in Essar Power shall be subject to the prior approval of EPH in relation to a number of matters including the following matters: (a) capital expenditures or acquisitions of assets, unless already in the annual business plan; (b) all related party transactions including the terms and conditions for such transactions; and (c) declaration or payment of any dividend.

EOL call option agreementUnder a call option agreement dated 6 April 2010 and the related addendum agreement signed on 30 December 2010, Essar Energy Holding (‘EEH’), a subsidiary of the Company, has an option to acquire the shares held by Essar Investments in EOL in the period between 1 May 2010 and 31 December 2011 at the higher of: (a) Rs. 153 and (b) the minimum price required to be paid under applicable law, which is currently the closing price of the shares of EOL on the relevant stock exchange on the date preceding the date of the transfer of the shares. In the event of the option lapsing, holding cost payable is measured as 10% of the higher of (a) the average weekly high and low of the closing prices of the share of EOL during the 26 weeks period prior to 1 January 2012; and (b) the average of the daily high and low of the prices of the shares EOL during the two week period prior to 1 January 2012.

The shares held by Essar Investments Limited are presently pledged in favour of various Indian banks and the actual transfer of the shares pursuant to the exercise of the call option by EEH will be subject to the release of these pledges by the relevant banks. In light of the shares being pledged, the addendum agreement extended the vesting period of the option by a further 12 months. Essar Investment Limited has also waived the holding costs payable as the shares cannot be delivered and are encumbered.

28g. Remuneration of Directors and key-management personnelRemunerations paid to Directors and key management personnel were primarily in the form of short term employee benefits amounting to US$4.0 million (2009: US$1.3 million).



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29. Subsidiaries



As at 31 December

No. Company Country of Incorporation Principal activities 2010 2009 2010 2009

1 Essar Energy Holdings Limited Mauritius Investment holding 100.0 100.0 100.0 100.0

2 Vadinar Oil Mauritius Investment holding 100.0 100.0 100.0 100.0

3 Essar Oil Limited India Refinery and marketing 87.1 76.7 87.1 76.7

4 Vadinar Power Company Limited India Captive power plant 100.0 100.0 77.4 68.9

5 Essar Oil Vadinar Limited1 India Refinery – 100.0 – 76.7

6 Essar Energy Overseas Limited Mauritius Investment holding 100.0 100.0 100.0 100.0

7 Essar Petroleum (East Africa) Limited Kenya Trading 100.0 100.0 100.0 100.0

8 Essar Oil (UK) Limited United Kingdom Investment holding 100.0 100.0 100.0 100.0

9 Essar Oil Germany GmbH Germany Investment holding 100.0 100.0 100.0 100.0

10 Essar Oil Stanlow Limited United Kingdom Investment holding 100.0 100.0 100.0 100.0

11 Essar Syngas Limited2 Mauritius Investment holding 100.0 100.0 100.0 100.0

12 Essar Infrastructure Africa Limited Nigeria Investment holding 100.0 100.0 100.0 100.0

13 Essar Chemicals Limited Mauritius Investment holding 100.0 100.0 100.0 100.0

14 Essar Gujarat Petrochemicals Limited India Petrochemical 100.0 100.0 100.0 100.0

15 Essar Arkema Chemicals Holdings Limited2

Mauritius Investment holding100.0 100.0 100.0 100.0

16 Essar Eastman Chemicals Holdings Limited2


17 Essar Exploration and Production Limited Mauritius Exploration and Production 100.0 100.0 100.0 100.0

18 Essar Exploration & Production Limited Nigeria Exploration and Production 100.0 100.0 100.0 100.0

19 Essar Exploration and Production India Limited

India Exploration and Production100.0 100.0 100.0 100.0

20 Essar Exploration and Production Madagascar Limited2

Madagascar Exploration and Production 100.0 100.0 100.0 100.0

21 Essar Power Holdings Limited Mauritius Investment holding 100.0 100.0 100.0 100.0

22 Essar Power Hazira Holdings Limited (Formerly: Hazira Steel 2)


23 Essar Minerals FZE UAE Mining Company 100.0 – 100.0 –

24 Algoma Power Cooperatief U.A Netherlands Investment holding 100.0 100.0 100.0 100.0

25 Algoma Power B.V Netherlands Investment holding 100.0 100.0 100.0 100.0

26 Essar Power Canada Limited Canada Power plant 100.0 100.0 100.0 100.0

27 Algoma Energy LP3 Canada Power plant – 100.0 - 100.0

28 Essar Power Limited India Power plant 74.0 66.2 74.0 66.2

29 Essar Power Overseas Limited BVI Investment holding 100.0 100.0 74.0 66.2

30 Essar Power Transmission Company Limited

India Power Transmission100.0 100.0 74.0 66.2

31 Essar Power (Jharkhand) Limited India Power plant 100.0 100.0 74.0 66.2

32 Essar Power Chattisgarh Limited India Power plant 100.0 100.0 74.0 66.2

33 Essar Power Hazira Limited (formerly named Essar Hazira Power SEZ Limited)

India Power plant100.0 100.0 74.0 66.2

34 Essar Power MP Limited India Power plant 100.0 100.0 74.0 66.2

35 Essar Power Gujarat Limited India Power plant 100.0 100.0 74.0 66.2

36 Essar Wind Power Private Limited India Wind turbine 100.0 100.0 100.0 66.2

37 Essar Power (Orissa) Limited4 India Power plant 74.0 74.0 54.8 49.0

38 Essar Power Tamil Nadu Limited India Power plant 100.0 100.0 74.0 66.2

39 Essar Electric Power Development Corporation Limited

India Power trading100.0 100.0 74.0 66.2

40 Bhander Power Limited India Power plant 74.0 74.0 54.8 49.0

41 Essar Power Salaya Limited (Formerly: Essar Power Paradeep Limited)

India Power plant100.0 100.0 74.0 66.2

42 Main Street 736 (Proprietary) Limited South Africa Investment holding 100.0 100.0 100.0 100.0

43 Essar Energy Services (UK) Limited United Kingdom Investment holding 100.0 – 100.0 –

44 Essar Energy Services (Mauritius) Limited Mauritius Investment holding 100.0 – 100.0 –

45 Essar Power (Nepal) Holdings Limited Mauritius Investment holding 100.0 – 100.0 –


29. Subsidiaries continued



As at 31 December

No. Company Country of Incorporation Principal activities 2010 2009 2010 2009

46 Essar Power (East Africa) Limited Kenya 100.0 – 100.0 –

47 Navabharat Power Private Limited India Power plant 100.0 – 74.0 –

48 Essar Power & Minerals S.A. Limited Mauritius Investment holdings 100.0 – 74.0 –

49 Essar Recursos Minerals de Mozambique Limitada

Mozambique Coal mine100.0 – 74.0 –

50 PT Essar Minerals Indonesia Indonesia Coal mine 100.0 – 74.0 –

51 PT Bara Pratma Indonesia Indonesia Coal mine 100.0 – 74.0 –

52 PT Manoor Bultan Lestari Indonesia Indonesia Coal mine 100.0 – 74.0 –

1 Merged with Essar Oil Limited. 2 Under liquidation. 3 Merged with Essar Power Canada Limited. 4 Holding reflected economic interest including Participating Preference Shares issued by the entity to Essar Power Limited, its direct parent.

30.Subsequent eventsSignificant events since the balance sheet date are set out on page 52.



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Note2010

$ million

non-current assetsInvestment in subsidiaries 32 3,868.9Current assetsAmounts receivable from subsidiaries 33a 225.3Cash and cash equivalents 33b 408.9total current assets 634.2total assets 4,503.1

Current liabilitiesOther payables 34 14.0total liabilities 14.0net assets 4,489.1

equityShare capital 22 99.0Share premium account 2,043.8General reserve 1,160.6Other reserve 1,160.7Retained earnings 25.0total equity 4,489.1

The financial statements of Essar Energy plc (registered number 7108619) for the period from incorporation on 18 December 2009 to 31 December 2010 were approved by the Board of Directors and authorised for issue on 18 March 2011. They were signed on its behalf by:

Mr naresh nayyarChief Executive

Company balance sheet As at 31 December 2010


Equity attributable to equity holders of the Company

Share Capital

(Note 22) $ million

Share premium $ million

General reserve

$ million

Other reserve

$ million

Retained earnings $ million

Total equity

$ million

At 18 December 2009 – – – – – –

Issues of shares to Parent 76.5 1,414.6 – – – 1,491.1

Issues of shares on IPO 22.5 1,864.1 – – – 1,886.6

IPO related expenses – (74.3) – – – (74.3)

Transfer (Note 36) – (1,160.6) 1,160.6 – – –

Gift of interest in subsidiaries from Parent (Note 37) – – – 1,160.7 – 1,160.7

Comprehensive income for the period – – – – 25.0 25.0

Balance at 31 December 2010 99.0 2,043.8 1,160.6 1,160.7 25.0 4,489.1

Company statement of changes in equityFor the period ended 31 December 2010


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2010 $ million

Cash flow from operating activitiesProfit before tax 29.6 Adjustments to reconcile profit before tax to net cash used in operating activities:Interest income (2.9)Foreign exchange gains (41.3)IPO costs charged to income statement 2.2 Changes in liabilities:Increase in other payables 9.5 net cash used in operating activities (2.9)Cash flow from investing activitiesInvestment in subsidiaries (1,217.2)Trade advances provided to subsidiaries (225.0)Interest received 2.6 net cash used in investing activities (1,439.6)Cash flow from financing activitiesProceeds from issuance of shares 1,812.3 IPO costs charged to income statement (2.2)net cash generated from financing activities 1,810.1 Net increase/(decrease) in cash and cash equivalents 367.6 Effect of exchange rate changes on cash and cash equivalents 41.3 Cash and cash equivalents at beginning of year – Cash and cash equivalents at the end of the year 408.9

Company statement of cash flowsFor the period ended 31 December 2010


31. Significant accounting policiesThe separate financial statements of the Company, Essar Energy plc (formally a private limited company named Goliath I Limited was subsequently renamed Essar Energy Limited and became a public limited company on IPO) from incorporation on 18 December 2009 to 31 December 2010 are presented as required by the Companies Act 2006 and prepared in accordance with EU Endorsed IFRSs and the relevant Group accounting policies as set out in Note 1 and Note 2 of the consolidated financial statements.

The Directors have taken advantage of the exemption offered by Section 408 of the Companies Act 2006 not to present a separate income statement for the Parent Company. The Company’s financial statements have been prepared on the historical cost basis. Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.

32. Investment in subsidiaries

$ million

Cost at 18 December 2009 –

Gifted investments by Parent Company 1,160.6

Share application money invested by Parent Company 1,491.1

Additional investments in the period 1,217.2

Cost at 31 December 2010 3,868.9

33. financial assets33a. Amounts receivable from subsidiariesAmounts due from subsidiaries relate to US$225.0 million of trade advances provided to the Refining and Marketing businesses for working capital requirements. These trade advances carry an interest of 1.4% and at 31 December 2010 interest of US$0.3 million is receivable.

33b. Cash and cash equivalents


$ million

Cash at banks 1.6 Bank deposits 62.3Liquid investments 345.0 Cash and cash equivalents 408.9

Bank deposits have a maturity period of less than 90 days. Liquid investments represent cash deposited in mutual funds which are fully liquid and can be realised without notice and without significant risk of loss of value.

34. financial liabilitiesOther payables (current)


$ million

Tax payable 4.5 Other payables and accrued expenses 3.3Amounts due to subsidiaries 3.7Amounts due to related parties 2.5 Other payables 14.0

Other payables and accrued expenses principally comprise amounts outstanding for Company related purchases and ongoing costs. The average credit period available for such purchases is approximately 30 days.

Amounts due to subsidiaries are in respect of services provided to the Company by its subsidiaries and are payable on issue of invoice. Amounts payable to related parties relate to IPO related costs paid by the Parent Company on behalf of the Group which have been subsequently recharged to the Company.

notes to the company financial statementsFor the period ended 31 December 2010


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35. financial instrumentsFinancial assets and liabilities in the Company’s balance sheet comprise of amounts due from subsidiaries (Note 33a), cash and cash equivalents (Note 33b) and certain amounts reported within other payables (Note 34). The fair value of financial assets and liabilities at 31 December 2010 approximate their carrying amount.

The Company’s principal activity is acting as the Parent Company for the Group as described in Note 1 of the consolidated financial statements; as such it does not conduct significant operations other than carrying out functions of a holding company. Financial risks are managed and monitored on a Group basis in accordance to the policies set out in Note 23.

36. General reserveAmounts previously held within share premium of US$1,160.6 million relating to the Parent Company’s investment in the Company were transferred to the general reserve, a distributable reserve, following a resolution by the Board during the period.

37. other reserveAs part of the reorganisation of the Group prior to IPO, EGL, gifted its interest of US$1,160.7 million in Essar Power Holdings Limited and Vadinar Oil Limited (through its direct subsidiary Essar Energy Holdings Limited) to the Company. The gift of this interest was reflected within the other reserve during the period.

38. subsidiaries Details of the Company’s subsidiaries at 31 December 2010 are given in Note 29.

39. corporate guaranteesThe Company has provided guarantees of US$434.4 million to lenders in respect of its subsidiaries at 31 December 2010. All guarantees provided have been treated as insurance contracts in line with the Group’s accounting policies.

40. related partiesThe Company has undertaken transactions with its ultimate Parent Company, EGL, and is subsidiaries during the period. The outstanding balances with subsidiaries and the Parent Company are set out in Note 33 and 34.

The Company receives services from Essar Energy Services (UK) Limited and Essar Energy Services (Mauritius) Limited (the “Service Companies”), two of its subsidiaries, as part of a series of shared services agreements signed in April 2010. The Service Companies provide services to Essar Energy plc which are in turn sourced from other Essar affiliated companies as discussed in Note 28 of the consolidated financial statements. The share of services agreements with the Service Companies are initially for a period of 7 years and can be terminated thereafter by issuing a notice of 6 months. The costs incurred by the Company since incorporation

Remunerations paid to Directors and key management personnel since incorporation were primarily in the form of short term employee benefits amounting to US$3.3 million.


Definition and comparability of CP GRM GRM is calculated as actual sales net of crude costs derived from the accounts. Inventory gains and losses, hedging gains and losses and sales tax benefit for the period also form part of the GRM. Based on this method of calculation, Essar Energy’s reported GRMs are not directly comparable to the performance of other refiners, other refining benchmarks and industry reports due to following reasons:

The Vadinar refinery operates in the State of Gujarat and benefits from a Government sales tax incentive, although the validity ¸¸

of this benefit is being contested by the State of Gujarat in Supreme Court of India. In India, domestic products are sold based on Government decided formulae known as Refinery Transfer Price, (‘RTP’). RTP of ¸¸

LPG and Kerosene are based on the average market price of the previous month, while for other products including gasoil and gasoline it is based on the average price of the previous fortnight. As a result the revenues may not match the prevailing product prices for the period. The Company adopts the first in, first out (FIFO) methodology for crude inventory valuation. As a consequence the cost of crude ¸¸

consumed can be crude purchased in earlier periods which may not reflect current prevailing crude prices. For crudes with a long voyage time these differences can be more significant. Sales quantity does not directly match actual production during the period as there may be inventory movement compared to ¸¸

a previous period. Commodity derivative instruments are used to act as an economic hedge against the price risk of forecast crude oil purchases, ¸¸

future refined product sales and future product crack margins. These derivative instruments are required to be recorded at fair value with gains and losses recognised in income because hedge accounting is not applied.

The following adjustments are made to the accounting GRM to provide a CP GRM that reflects underlying operational performance and better communicates industry comparable performance of the refinery. These adjustments are as follows:

The sales quantity is taken as actual production during the period. This eliminates the effect of inventory gains and losses in the ¸¸

GRM. This sales quantity is allocated into export and domestic sales based on the actual ratio of export and domestic sales for the period. The cost of crude is taken at the current prices of crude grades actually consumed, net of premium or discounts as applicable. ¸¸

Prevailing custom duty is applied on the cost of crude. To calculate the revenue from the sales quantity the domestic sales price is valued based on the RTP of the same period rather ¸¸

than any other period. Export prices are based on actual realised export prices, as they do not have timing differences. Revenue is adjusted for premiums or discounts achieved by the Company. For domestic sales custom duty recovery is built up in RTP itself whilst duty benefit for exports is added separately. The impact of economic hedging gains or losses is excluded. ¸¸

The impact of the Gujarat Government sales tax benefit is separately identified.¸¸

Appendix 1

Relationship Agreement - Key Terms (referred to in the Directors’ report on page 50 above).The key terms of the Relationship Agreement are set out below:(i) Essar Global will exercise its powers as shareholder to ensure that the Company is capable, at all times, of carrying on its

business independently of Essar Global and its Associates;(ii) the Company and Essar Global agree that transactions and relationships between the Group and Essar Global and its

Associates will be at arm’s length and on a normal commercial basis, except in the case where the size of such transaction or arrangement is such that (a) each of the applicable percentage ratios (as defined in the Listing Rules) for such transaction or arrangement, when aggregated with other such transactions or arrangements in any 12 month period, is equal to or less than 0.25% or (b) the Listing Rules in force at the relevant time would not apply, whichever is the smaller;

(iii) Essar Global shall not and shall procure (so far as it is legally able) that its Associates shall not take any action (or omit to take any action) to prejudice Essar Energy’s status as a listed company or its suitability for listing under the Listing Rules after Admission has occurred or Essar Energy’s ongoing compliance with the Listing Rules and the Disclosure Rules and Transparency Rules, provided this does not prevent Essar Global or its Associates from accepting an offer for Essar Energy made under the City Code on Takeovers and Mergers or making such an offer for Essar Energy;

Appendix 2


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(iv) Essar Global has agreed that except as may be required by law, as contemplated by the Relationship Agreement or as unanimously agreed by the independent Non-Executive Directors, it will exercise the rights attaching to its ordinary shares to ensure that, so far at it is legally able, Essar Energy is managed in accordance with the Companies Act, the Listing Rules, the Disclosure Rules and Transparency Rules and that the principles of good governance set out in the Combined Code are complied with by Essar Energy;

(v) Essar Energy shall use its reasonable endeavours to procure and Essar Global shall exercise its powers as shareholder to procure, so far as it is reasonably able, that at all material times: at least half of the Board (including the Chairman) will be independent Non-Executive Directors, the Audit and Remuneration Committees will consist only of independent Non-Executive Directors and the Nominations and Governance Committee will consist of a majority of independent Non-Executive Directors;

(vi) Essar Global is entitled to nominate such number of Directors for appointment to the Board to as to ensure that at least half the Board (including the Chairman) will be independent Non-Executive Directors;

(vii) Directors of Essar Energy nominated by Essar Global shall not be permitted, unless the independent Directors agree otherwise, to vote on any resolutions of the Board to approve any aspect of the Company’s involvement in or enforcement of any arrangements, agreements or transactions with any member of the Essar Group;

(viii) Essar Global shall procure that the Directors nominated by Essar do not vote on any resolution at meetings of the Board relating to the entry, variation, amendment, novation, termination, abrogation or enforcement of any contract, arrangement or transaction between the Company and the Essar Group;

(ix) Essar Global agrees that in the event that any member of the Essar Group is proposing to enter any arrangements with another member of the Essar Group or with the Company in connection with substantially similar products, goods or services, no member of the Essar Group will be offered such arrangement on more favourable terms or be given preference over the Company;

(x) Essar Global shall notify Essar Energy of all dealings between the Essar Group and the Company that are not of a revenue nature in the ordinary course of business and are of a revenue nature in the ordinary course of business;

(xi) The parties agree to use commercially reasonable efforts to put in place a process in relation to dealings between the Essar Group and the Company following the date of admission to ensure, inter alia, that dealings where the size of the dealing is such that (a) any percentage ratio (as defined in the Listing Rules) in relation to the relevant transaction exceeds 0.25% when aggregated with other such transactions in any 12 month period or (b) any smaller percentage ratio applicable to dealings between related parties under the Listing Rules in force at the relevant time would apply to such transaction, are on arm’s length terms; to agree the standard terms and conditions on which ordinary course arrangements between the Essar Group and the Company following admission are entered into and to take all reasonable steps to ensure such terms and conditions apply to such arrangements in place as at admission;

(xii) Essar Global shall not cause or permit any amendment to the Articles which would be inconsistent with the Relationship Agreement or affect the listing of Essar Energy;

(xiii) Essar Global and its Associates have agreed not to misuse and maintain confidential any confidential information received by them and are only entitled to disclose such information in the circumstances set out in the Relationship Agreement; and

(xiv) Essar Global represents and warrants that neither it, nor, to the best of its knowledge, any of its Associates, currently own or have any interest in any company or business the principal business of which is crude oil refining, oil and gas exploration and production, gas or power generation worldwide (each a ‘Competing Business’) other than: through the Company or the Group; in respect of the 30 MW thermal captive power plant at Hazira and the 35 MW thermal captive power plant at Vizag; and in respect of the Myanmar exploration blocks. Essar Global undertakes that for the duration of the Relationship Agreement and one year following, it shall not, and shall procure (to the extent it is reasonably able) that its Associates shall not, acquire or have any interests in or carry on or be involved with any Competing Business except: where any acquisition, investment, carrying on or involvement in a Competing Business has been approved by a majority of the independent Non-Executive Directors; the acquisition or ownership of a Competing Business, the opportunity to acquire or invest in which has been offered or made available to the Company and which the independent Non-Executive Directors have determined (such determination being recorded in writing) is not an opportunity which the Company is able or willing to pursue, where (except where the independent Non-Executive Directors determined that the opportunity was of a nature which it was not appropriate for the Company to pursue on any terms, such determination being recorded in writing) Essar Global or its Associates participates in such opportunity on terms which are not more favourable overall than those which were available to the Company; the acquisition or ownership of not more than 15% of any Competing Business that is listed or traded on a public stock exchange, where Essar Global has not appointed or does not have the right to appoint representatives to the Board or senior management of such business, it does not have the right to exercise material influence over such business and such acquisition or ownership would not result in the Company being obliged to acquire an increased ownership of such business; a passive investment only is held in a fund or similar entity where Essar Global has no control or influence over or involvement in the management of the relevant business held by the fund or similar entity and, so far as Essar Global is aware to the best of its knowledge having made reasonable enquiry, no more than 15% of the fund or similar entity’s investments by value are in Competing Businesses; in relation to the exploration, extraction and processing of minerals (which excludes natural gases and hydrocarbons); captive power plants where such interest, carrying on of business or involvement is for tax efficiency and/or regulatory purposes and is approved in advance by the independent Non-Executive Directors in writing; where an interest in, carrying on of, or involvement in a Competing Business is for a regulatory purpose and is approved in advance by the independent Non-Executive Directors in writing; any interest in, carrying on of business or involvement in respect of the Myanmar exploration blocks.

Appendix 2 continued


Glossary

2C contingent resources where 50% of the possible outcomes are greater than the 2C value2p proven plus probable reservesAbt availability based tariffAfS available for saleAGM Annual General Meetingbbl/d barrels of crude oil (159 litres by volume) per daybcf billion cubic feetbclear a derivatives trading systemboard or Directors the Board of Directors of Essar Energy plcbRIC Brazil, Russia, India & ChinaCAGR compound annual growth rateCeR Certified Emission ReductionCoal bed Methane or CbM coal bed methane refers to the gas (principally methane) which is found in coal seamsCoal Linkage the allocation of coal in India on a short term or long term basis through the government’s

Standing Linkage CommitteeCombined Code the Combined Code on Corporate Governance dated June 2008 published by the

Financial Reporting CouncilCp current priceCp ebItDA current price EBITDA, as defined further in Appendix 1Cp GRM current price GRM as defined further in Appendix 1ebItDA earnings before interest, tax, depreciation and amortisationeff Essar Family FoundationeOL Essar Oil LimitedeeH Essar Energy Holding LimitedepC engineering, procurement and constructionepOL Essar Power LimitedepH Essar Power Holding LimitedepS earnings per shareeRMML Essar Recursos Minerals Mozambique Limitadaessar Affiliated Company members of the Essar Group and any other companies which are not part of the Group essar energy or the Company Essar Energy plcessar Global/eGL Essar Global Limitedessar Group Essar Global and its subsidiaries, that are not part of the Groupessar projects Essar Projects (India) Limited, formerly Essar Construction (India) Limited, an Essar

Affiliated CompanyeSOp Employee Stock Option Planeu European UnionfSA the Financial Services Authority in the UKftSe 100 share index of the 100 most highly capitalised UK companies listed on the London

Stock ExchangeftSe 350 a market capitalisation weighted stock market index incorporating the largest

350 companies by capitalisation which have their primary listing on the London Stock Exchange

fvtpL fair value through profit or lossGDp gross domestic product, the total value of goods and services produced by a countryGeRC Gujarat Electricity Regulatory CommissionGRM Gross Refinery MarginGroup Essar Energy and its subsidiariesGw gigawatt (one gigawatt equals 1,000 megawatts)GuvnL Gujarat Urja Vikas Nigam Limited, the State Electricity Board of GujaratHSe health, safety and environmentHSeMS health, safety and environmental management systemsIAS International Accounting StandardsIfRS International Financial Reporting StandardsIMS Integrated Management SystemsIpO initial public offering of shares in Essar Energy plc ISO the International Organization for StandardisationISO 9001 internationally recognised standard for the quality management of businessesISO 14001 an international standard established by the ISO to certify environmental

management systems


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km kilometresKpRL Kenya Petroleum Refinery Limitedkwh kilowatt hoursLIbOR London Inter-Bank Offer RateLIffe COnneCt London International Financial Futures and Options Exchange, a global derivatives trading

system LILO line-in line-outListing the admission of the ordinary shares to the premium listing segment of the Official List and

to trading on the London Stock Exchange’s main market for listed securitiesLSe London Stock ExchangeLtIfR lost time injury frequency rateManagement members of the Company’s management team including the Directors, details of whom

are set out on pages 8 to 10 MAt minimum alternative taxMerchant Sales sales of power made on a short term or uncontracted basismg milligramsmmboe million barrels of oil equivalentmmbbl million barrelsmmscm million metric standard cubic metresmmt million metric tonnesmmtpa million metric tonnes per annummmscm/d million standard cubic metres per dayMRA a master restructuring agreement entered into by Essar Oil Limited with the lenders

on 17 December 2004MSCI uK index a benchmark index managed by MSCI (Morgan Stanley Capital International)mt million tonnesMw megawattMwh megawatt per hournavabharat power Navabharat Power Pvt. Limited non-executive Directors the Non-Executive Directors of Essar Energy plcOCCRpS Optionally Convertible Cumulative Redeemable Preference SharesOfficial List the official list of the FSAOHSAS 18001 international standards used to certify occupational health and safety management

systemsOpL 226 offshore oil and gas block in NigeriapLR prime lending rateppA power purchase agreementproject Management Committee committee overlooking progress of all major projects of the Companyprospective resources prospective resources are undiscovered and potentially recoverablept bpI PT Bara Pratama IndonesiaRatna/R Series fields an oil and gas block offshore Mumbai, IndiaRelationship Agreement the relationship agreement dated 30 April 2010, between the Company and Essar Global,

as defined in more detail on page 50Rs Indian rupeesRtp Refinery Transfer Pricescm/d standard cubic metres per daysq. km square kilometresState electricity boards a state owned electricity utility operating in one of the states in Indiatcf trillion cubic feetunderwriting Agreement the underwriting agreement entered into on 30 April 2010 between Essar Energy plc,

the Directors and the underwriters at the time of the IPO as described on page 51unfCCC United Nations Framework Convention on Climate Changeunrisked in-place resources undiscovered resources estimated to be contained in accumulations yet to be discovered


Shareholder Information page

Shareholder interests as at 31 December 2010

Number of shareholders 654

Number of shares in issue 1,303,437,293

by size of holdingShareholders

%Shares

%

500 and under 10.86 0.002

501 to 1,000 10.24 0.004

1,001 to 10,000 26.61 0.05

10,001 to 100,000 27.83 0.6

100,001 to 1,000,000 18.04 3.5

Over 1,000,000 0.15 95.844

100% 100%

AGMThe AGM will be held on 18 May 2011. The Notice of Meeting and the Form of Proxy are enclosed with this Annual Report. Company websiteEssar Energy annual report and results announcements are available on our website at www.essarenergy.com. The website can also be used by shareholders to access the latest information about the Company and press announcements as they are released, together with details of future events and who to contact for further information.

RegistrarsFor information about the AGM, shareholdings and to report changes in personal details, shareholders should contact:

Computershare Investor Services pLCThe PavilionsBridgwater RoadBristolBS99 6ZZUnited KingdomTelephone: +44 (0)87 0707 1834Fax: +44 (0)87 0703 6116Email: [email protected]

Investor RelationsFor investor enquiries, please contact:

Mark LidiardDirector of Investor Relations and CommunicationsEssar Energy plc3rd Floor, Lansdowne House57 Berkeley SquareLondon, W1J 6ERTelephone: +44 (0)20 7408 7660Email: [email protected]

Registered officeessar energy plc3rd Floor, Lansdowne House57 Berkeley SquareLondon, W1J 6ERTelephone: +44 (0)20 7408 7000

Registered number07108619

Head officeessar energy plc6th Floor, DCDM Building10 Frere Felix de Valois StreetPort LouisMauritiusTelephone: +230 202 3136

Company Secretaryexecutive Services Limited2nd Floor, Les Jamalacs BuildingVieux Conseil StreetPort LouisMauritius

AuditorsDeloitte LLp2 New Street SquareLondon, EC4A 3BZ




Certain statements included in this Annual Report and Accounts contain forward-looking information concerning the Group’s strategy, operations, financial performance or condition, outlook, growth opportunities or circumstances in the countries, sectors or markets in which the Group operates. By their nature, forward-looking statements involve uncertainty because they depend on future circumstances, and relate to events, not all of which are within the Group’s control or can be predicted by the Group. Although the Group believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Actual results could differ materially from those set out in the forward-looking statements. For a detailed analysis of the factors that may affect our business, financial performance or results of operations, we urge you to look at the Principal Risks and Uncertainties included in this Annual Report and Accounts. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in the Group or any other entity, and must not be relied upon in any way in connection with any investment decision. The Group undertakes no obligation to update any forward-looking statements.

www.emperordesign.co.uk

Registered office:

Essar Energy plc3rd FloorEast WingLansdowne House57 Berkeley SquareLondon W1J 6ERT: +44 (0) 20 7408 8760

www.essarenergy.com

Head office:

Essar Energy plc6th FloorDCDM Building10 Frere Felix de Valois StreetPort LouisMauritiusT: +230 202 3136


Documents

Essar Energy Annual Reports and Accounts