Message-ID: <16584538.1075859828805.JavaMail.evans@thyme> Date: Tue, 22 May 2001 04:39:00 -0700 (PDT) From: issuealert@scientech.com Subject: Enron Locked in Contentious Battle over Indian Project Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "SCIENTECH IssueAlert" X-To: X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\Notes inbox X-Origin: Haedicke-M X-FileName: mhaedic.nsf Today's IssueAlert Sponsors: [IMAGE] Switch Rates, Predictions and Analysis in Retail Energy Foresight. Rely on Retail Energy Foresight for current and projected switch rates and thoughtful analysis on restructured energy markets and related issues. Download FREE trial copies at www.xenergy.com/xensecure.nsf or contact Susan Weber at 781.273.5700 or via e-mail at sweber@xenergy.com. 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Visit our website at www.scientech.com for a detailed description of these valuable maps and complete ordering instructions. [IMAGE] [IMAGE] May 22, 2001 Enron Locked in Contentious Battle over Indian Project By Will McNamara Director, Electric Industry Analysis [IMAGE][News item from Reuters] The Indian federal government is optimistic that Enron Corp. (NYSE: ENE) and the Maharashtra state government will resolve their wrangle, which has jeopardized the U.S. energy giant's $2.9 billion power project. Indian lenders want their federal government to intervene after a threat by Enron Corp., the country's largest foreign investor, to walk out of a giant power project has put the loan of the Indian groups in jeopardy. Local lenders including the Industrial Development Bank of India and the country's largest commercial bank, State Bank of India, stand to lose billions if Enron pulls out the deal. On May 19, Enron took a major step toward pulling the plug on the project by issuing a notice to terminate its contract to sell power to the Maharashstra state. Analysis: This news item is significant for two reasons. First, Enron's ongoing troubles in India are causing other power companies to also scramble from their investments in the country or avoid India altogether. This comes at an unfortunate time for the undeveloped country, as it was hoped that the investment from Enron and other companies would provide a significant financial boost to India's energy infrastructure. Second, it is rather ironic that Enron, which has gained an earnings boon from its wholesale and trading activities in the United States, has faced financial challenges overseas by following the one business strategy that it has mostly avoided in this country: owning hard generation assets. By way of background, Enron was first approached by the Maharashtra government back in 1992 regarding the joint development of a new power project to serve the western part of India. In the mid-1990s, Enron broke ground on the 2,184 MW project on India's western coast (near Bombay, which is the capital of Maharashtra) that reportedly will be the largest natural gas-fired power project in the country upon its completion. Some reports suggest that it is the largest natural-gas plant in the world. The plant is in the midst of its first operational phase (with 750 MW up and running) and is scheduled to begin its second phase (1,444 MW) in June. The company that owns and operates the power project is Dabhol Power Company, in which Enron holds a 65-percent interest (the state of Maharashtra owns the other 35 percent). Under terms of the contract, the state of Maharashtra agreed to purchase the totality of power produced at Enron's plant. However, problems began to surface over the last six months or so, heightened by Maharashtra's recent default on payments to Enron. Dabhol Power has been criticized for charging 7.1 rupees per kilowatt-hour, compared with the market's average of 1.5 rupees (for conversion purposes, $1 equals 46.93 rupees). Citing what it claimed were high costs charged by Dabhol, the state of Maharashtra reportedly refused to pay for any power produced from the second phase of the Dabhol plant. At last count, the state government owes Enron approximately $48 million for power transactions completed last December and January, and could owe $607 million if the contract is terminated. Citing payment defaults by the state of Maharashtra and non-cooperation from both the state and federal government in India, Enron issued a preliminary notice to terminate future power sales from its Dabhol plant. Enron also declared a state of force majeure, a legal strategy that allows a company to break a contract for reasons beyond their control. In response, Indian leaders-driven by valid concerns about the financial repercussions that a broken contract would have-are requesting the country's federal government to intervene and prevent any break in the contract. Lenders such as the State Bank of India, the country's largest commercial bank, also plan to fight Enron on its plans to rescind the contract. As noted, Enron's problems in India are causing a damaging domino effect for the undeveloped country. Being the international energy giant that it is, Enron probably won't suffer too much if it does indeed terminate its contract with the Indian government, and perhaps can find another buyer in the country for the power produced by the Dabhol plant. Enron also has reportedly pulled out from all of the other projects in India in which it had once planned to invest, including Metgas (a liquefied natural-gas pipeline) and India-based projects led by Enron Broadband Services and Enron Oil & Gas. This ongoing divestiture in India should reduce the company's risk exposure related to the country's instability. On the other hand, the failed contract will most likely do a fair amount of damage to the energy market in India, which is already perceived as a less than lucrative country in which to develop power projects. Some reports have indicated that India received only $2.6 billion in foreign investment in 2000, representing three times less than Singapore, a country representing only one-fourth of the economy of India. Any deterrent toward further power expansion in India would exacerbate concerns about the country's ability to meet growing demand for electricity. Further, at least four foreign power companies (Cogentrix of the United States, EDF of France, Powergen of the United Kingdom, and Daewoo Corp. of South Korea) already have pulled out of the Indian energy market. At the same time, many domestic companies also have postponed their own power projects as a result of legal obstacles. In addition to a tainted reputation, Indian leaders also stand to lose financially as well, as loans given to the Indian government reportedly are not covered by any guarantee (unlike overseas lenders who are protected by guarantees). Enron's announcement that it intends to terminate the contract has triggered a "cooling period" that will last for six months, during which time the Indian federal government will continue trying to convince Enron to maintain its end of the contract. Interestingly, in early May Enron said that it had "no immediate plans" to sell its stake in the Dabhol power project and added that it would make no move on the plant until the payment disputes with the state of Maharashtra are resolved. Other statements made by Enron Chairman Kenneth Lay have suggested that the company might continue to own the Dabhol project and proceed with the completion of the second phase, regardless of any payment that Maharashtra may or may not make. Given the sharp increase in demand that is expected in India, it would make sense for Enron to want to retain its majority ownership of the power plant and work a deal to sell its power to another Indian buyer. Enron has been fairly consistent with regard to its strategy of not owning hard assets on any long-term basis. Typically, Enron has accumulated infrastructure in various commodities (e.g., electricity generation, natural gas, bandwidth) in order to ensure that it can provide a product where the customer wants it. However, once Enron has established itself within that commodity, all it really needs is access to the infrastructure, rather than outright ownership, so divestiture has typically followed. The company might have perceived the Indian market to offer unique opportunities, due to the lack of infrastructure across the country. However, now it appears that Enron's majority ownership in the Dabhol plant may be causing more for the company than the assets are worth. The possible termination of the Dabhol contract with the state of Maharashtra would mark the third sales deal that Enron has broken in recent months. Most recently, the company announced that it is bowing out of $43.5-billion project to route Qatari gas to the United Arab Emirates and has sold its stake in Dolphin Energy to UAE Offsets Group for an undisclosed amount. In addition, Enron is being sued by a group of California universities over the schools' claim that the company breached a four-year contract, signed in 1998, to provide power at a 5-percent discount to the utility rate frozen by California's 1996 deregulation law. Scheduled to expire in 2002, the deal between Enron and the California university system included a peak power load of 350 MW and is estimated to be worth about $500 million. Although Enron cited problems associated with California's energy crisis, once in court the company disclosed that the contract with the California universities no longer represented an economic business strategy and that the company was actually losing money on the contracts (although it would not confirm a specific amount). 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