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Dabhol Power Company: Returns from debt

Tamal Bandyopadhyay | July 24, 2003

On Monday, the corporate debt restructuring committee of banks and financial institutions met at the Industrial Development Bank of India headquarters. On the agenda was the debt recast of the Rs 11,728-crore (Rs 117.28-billion) Essar Oil project.

At the end of the marathon six-hour meeting, bankers were all smiles; the recast package was passed with the approval of over 75 per cent of the lenders.

With this, the CDR platform has recast sticky debt worth over Rs 42,000 crore (Rs 420 billion) since its inception last year. Up to June 30 (before the Essar Oil deal was cleared), the CDR cleared loans worth Rs 37,460 crore (Rs 374.6 billion) involving 40 sticky assets. Another 13 cases involving Rs 8,500 crore (Rs 85 billion) are in the pipeline.

With the Essar Oil debt recast cleared and the restructuring of Haldia Petrochem's loan on the cards, the Indian financial system has come a long way from purgatory.

But one mega-troubled asset is left in the bag -- the Rs 12,500 crore (Rs 125 billion) Dabhol Power Company. An illustrious line of suitors -- including the Tatas, BSES, GAIL, British Gas, Gaz de France and Shell -- are waiting to take over the company.

But the infighting between domestic and foreign lenders and with General Electric and Bechtel, minor shareholders and, respectively, turbine supplier and EPC contractor, are hampering a solution.

The fallout of the internecine war, fought periodically at various meetings in Singapore and London over the past two years, is there for everybody to see: a series of legal cases in India and abroad.

None of the stakeholders want to budge an inch and compromise on their claims because they feel that the government is there as a fallback. For them, it is a political project that involves a state government as well as the federal (central) government and a counter-guarantee by the Centre (for phase I of the project).

First, a brief history of the project. Enron Power Corporation signed a memorandum of understanding with Maharashtra State Electricity Board in June 1992 to set up a 2015-MW power plant at Dabhol.

In April 1995, the BJP-Shiv Sena government came to power and decided to review the project. In January the next year, the project was renegotiated and its capacity was increased from 2,015 MW to 2,184 MW with phase I of the project having a capacity of 750 MW and phase II the rest. After re-negotiations, the revised PPA was signed in July 1996 and fresh counter-guarantees were issued.

Apart from power plants, the project also includes a 5 million tonne liquefied natural gas plant. Out of this, 2 MMT is required to run the plant and the rest is to be sold outside. The capacity can be raised to 10 million.

About 95 per cent of the LNG plant is being completed and another $ 84 million will be required to complete it. The cost of power is slated to drop by about 20 per cent once the plant switches to LNG from naphtha.

The cost of phase I -- which started commercial operations in May 1999 -- was Rs 3,500 crore (Rs 35 billion). In addition to that, around Rs 8,000 crore (Rs 80 billion) was spent for the second phase.

Considering the fact that around $ 200 million will be required to complete the project, the total cost for DPC would be around Rs 12,500 crore (Rs 125 billion). The equity component of the project is Rs 4,000 crore (Rs 40 billion). It was mothballed on May 29, 2001 after the MSEB suspended power purchase from the plant.

Let's take a look at the risk that the lenders to the project are running if it is junked. The collective exposure of Indian lenders to DPC is Rs 5,850 crore (Rs 58.5 billion). Out of this, Rs 3,350 crore (Rs 33.5 billion) is funded exposure and the rest in the form of guarantees.

IDBI has the maximum exposure of Rs 1,900 crore (Rs 19 billion), followed by State Bank of India Rs 1,700 crore (Rs 17 billion), ICICI Bank Rs 1,300 crore (Rs 13 billion), IFCI Rs 600 crore (Rs 6 billion) and Canara Bank Rs 350 crore (Rs 3.5 billion).

The exposure of foreign lenders is around $ 480 million. The team of foreign lenders includes ABN Amro Bank, Credit Suisse First Boston, ANZ Investment Bank, Citibank and Overseas Private Investment Corporation.

Besides being a lender, OPIC -- the US government promoted funding agency -- is also the political risk insurer for the project extending a $ 600 million cover to the equity holders as well as the overseas lenders.

Once a Wall Street star, the world's largest energy trader Enron Corporation, which now has the distinction of being the world's largest bankruptcy filing, holds 65 per cent stake through Enron Mauritius Co and Enron India Holdings.

The other stakeholders are General Electric and Bechtel (10 per cent each) and MSEB (15 per cent). Other players on the stage are the UK-based investment bank N M Rothschild, the financial advisor to the project; Belgium-based Tractabel, technical consultant; and Punj Lloyd, which has been maintaining the plant ever since it was mothballed.

DPC is hogging the limelight for all the wrong reasons: a string of legal cases fought at different platforms as well as the differences among the various stakeholders. For instance, GE and Bechtel want to buy out the Enron stake, and an early settlement of their dues of over $150 million.

Similarly, the offshore lenders to the project feel that the Indian lenders have breached the inter-creditor agreement and approached the London Arbitration Tribunal against them.

Their fault? That the domestic lenders had earlier succeeded in blocking DPC from issuing a termination notice (of the power purchase agreement) to the MSEB through court order.

The offshore lenders had voted in April to instruct DPC to proceed with the termination notice. This would have forced MSEB to take over the project and clear the dues of foreign lenders. The Indian lenders are also in favour of selling the assets of DPC instead of the company.

In an equity sale, the unlimited liabilities would be passed on to the new buyer, while in the case of sale of Dabhol assets, the liabilities are not passed on to the buyer as equity value becomes zero.

To do this, Indian lenders are willing to buy out the Enron stake, which may not be a difficult task as it is sure to come at a steep discount. Once the equity is bought out, they can just bury the company and all litigation will cease.

It is true that Punj Lloyd has not allowed the plant to rust. But time is rapidly running out for DPC. First, the cost of power equipment is dropping drastically.

This essentially means that the cost of erecting a new plant will be less and the lenders will have to bargain hard to get the right price for the plant.

Second, the DPC's edge on account of being a gas-based plant will also get blunted soon as two more LNG plants are being set up. Both are on the west coast.

One is Petronet LNG, being set up by GAIL, IOC, ONGC, BPCL at Dahej. The other is being set up by Shell at Hazira. Both have five million tonne capacity each. Besides, NTPC is also planning a 2,000-MW gas-based power plant. It has already floated a tender for the supply of LNG.

DPC could be a test case for the Electricity Bill, which allows open access system for transmission and distribution of power.

DPC power, which once went abegging, can be sold to the Indian Railways and other states that want power like Gujarat, Karnataka and Madhya Pradesh.

Power distribution is indeed a state subject but some states are taking steps to speed up reforms. The imbroglio can be lifted if all stakeholders stop looking at the government for the solution and treat the project as a commercial venture.

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