A severe cash crunch forces the sale of the global energy major Enron Corporation for a 'fire sale' price of $9 billion to Dynegy Inc, and this leaves the Dabhol project in a quandary.
THE energy behemoth Enron Corporation, once considered invincible, collapsed on November 10 after it was bought out for a paltry $9 billion by a smaller power-trading rival, Dynegy Inc. The multinational plunged into a financial crisis in October following disclosures of questionable off-balance sheet business deals, now under investigation by the United States Securities and Exchange Commission, and this led to the decision to sell.
Just a year ago Enron, the United States' largest natural gas and electricity trader, was valued at $80 billion. In an effort to raise investment, it was compelled to declare its financial transactions for the past few years to prospective investors. A month ago it was forced to include in its financial statement some murky transactions. It soon turned out that Enron's books were not entirely clean. For four years the balance sheet did not include several business transactions that shareholders have a right to know. These revelations eventually led to the energy major's downfall. Wall Street lost confidence in the company and there was a run on its coffers as trading partners were reluctant to extend credit. Some 90 per cent of Enron's revenues, which totalled nearly $140 billion in the first three quarters of 2001, came from energy trading. With cash running out and pressure building on it to do something, Enron entered into talks with Dynegy, a utility holding company, to sell at what is described as "fire-sale" price. Chevron Texaco Corp, an oil major which owns 27 per cent of Dynegy, will be chipping in $2.5 billion in the buy-out.
It is perhaps a little early to predict the effect of the merger on Enron's interests in India. Apart from the controversial $1-billion Dabhol Power Company (DPC), Enron holds a 30 per cent stake in the Panna-Mukta oilfields. The company had almost completed a deal with British Gas to sell that stake but complications over operatorship arose, and they remain unresolved.
A DPC spokesperson told Frontline that "while it is too early to declare whether an impact may come from this merger agreement, we do know that until the merger is accomplished in the third quarter of 2002 Enron will continue (in India) in its current role." Enron owned the majority 65 per cent stake in DPC. It has been trying to exit from the project for the past few months. Now Dynegy Inc. takes over Enron's share.
Whether it is Enron or Dynegy, it is clear that they are seeking to pull out of India, says Vivek Monteiro of the Centre of Indian Trade Unions (CITU). "We are more likely to be affected by the companies interested in buying Enron's stake in DPC. Ultimately, whoever it is will want to sell power to the MSEB (Maharashtra State Electricity Board) and this will always remain a major issue." The CITU contests the validity of the Power Purchase Agreement (PPA), and Monteiro says larger issues remain. For instance, nobody has questioned the price and valuation of DPC's shares. For instance, in the sale of the public sector Bharat Aluminium Company (BALCO) they used the discounted cash flow method, which brought down the valuation of the company. It would be interesting to know DPC's price, particularly since the company has a lot of liabilities, says Monteiro. Two Indian power companies - Tata Power and BSES (formerly Bombay Suburban Electric Supply) - have showed an inclination to purchase Enron's stake. Apart from Enron, the MSEB, Bechtel and GE are the other stakeholders in the project.
DPC, which runs the beleaguered 2,184-megawatt Dabhol project, has been fighting a protracted legal battle with the Government of Maharashtra (GoM) and the Government of India (GoI) over the non-payment of dues by the MSEB for over a year now. As part of the PPA, which itself has a controversial history, the MSEB is to pay DPC a fixed monthly charge of Rs.90 crores - whether it buys Dabhol power or not. The MSEB stopped these payments in October 2000 after accusing DPC of not providing power within the stipulated time defined in the PPA. DPC refuted these allegations and invoked the Centre's sovereign guarantee. The Centre upheld its promise once but not when DPC tried again. Following this, DPC issued a notice of political force majeure, and later notices of termination and arbitration.
The MSEB in turn cancelled the PPA and took DPC to court. Not to be outdone, DPC took the MSEB to court for involving the Maharashtra Electricity Regulatory Commission to sort out the issue. DPC refused to recognise the quasi-judicial body as it was constituted after the PPA was signed. For some time it appeared that the two were stuck in a legal quagmire. But with a London court preventing the GoM from stalling international arbitration proceedings, it is hoped that the issue would be sorted out amicably soon.
For DPC the order could not have come at a better time. With its debt mounting, neither its parent company nor its business partners appeared able to help the power project.
Although legal proceedings were on and DPC believed it had a fair chance of winning the cases as the PPA is known to be water-tight, by June 2001 Enron had begun hinting at quitting the project. When it became clear that DPC was up for sale, Indian and foreign lenders panicked. They have reason to feel worried. Of the more than Rs.13,000-crore investment in DPC, Indian financial institutions (IFIs) have an exposure of approximately Rs.6,000 crores.
On November 5, DPC served a notice of asset transfer to the MSEB. This move is one step short of serving the final termination notice. Just before DPC could serve the final termination notice (it has already issued two), the Bombay High Court upheld an appeal by the IFIs seeking a stay on the termination proceedings "in order to protect their security". DPC was restrained from issuing a final termination notice until December 3, 2001. Annoyed with the decision, DPC announced the cancellation of a multilateral meeting between lenders, buyers and Enron officials scheduled for November 7 in Singapore. It, however, relented and the meeting was held as planned. Coincidentally, it was during the same few days that Enron discussed its own sale with Dynegy Inc.
The Singapore meeting was held primarily to find a solution to the DPC crisis. According to a source, the meeting discussed a proposal, which has been speculated for some time now, to rope in the National Thermal Power Corporation (NTPC) to buy power from DPC along with the MSEB. An incentive package to make the project more attractive and a plan to re-structure tariff were also on the agenda. Meanwhile, Tata Power and BSES have been given the green signal to carry out a due diligence on DPC. Not willing to comment on whether a time-frame has been set to finalise the deal, Tata Power managing director Adi Engineer said, "We have submitted all the information and data they (financial institutions) asked for. It is up to them to respond."
A direct result of Dynegy purchasing Enron is that it is possible for Chevron Texaco to become one of the world's largest energy traders. It is known to have such ambitions. If it follows this goal, it is speculated that Chevron might retain Enron's assets, which may include DPC.
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