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Indian lenders may seek to buy Enron stake

Indian lenders are considering a way of buying out US energy giant Enron Corp's stake in a controversy-wracked $2.9 billion power project in India, a banking source told Reuters on Monday.

But the plan turns on other agreements being reached to slash the cost of the power produced by the Enron unit, the Dabhol Power Company, which in June halted work just short of completing a massive 2,184 MW plant on the coast south of Bombay.

The Indian lenders, who have a total exposure of around $1.4 billion, are discussing forming a special purpose vehicle to buy the plant, said the source, a top bank official.

"The option of an SPV is being explored. It could buy Enron's stake now and later sell it to an appropriate buyer," said the banker, speaking on condition he not be named.

A decision on whether to pursue that option is expected in the next few days, he added.

An SPV is a separate company set up for a specific, temporary purpose. In this case, India financial institutions which have lent money to finance the construction of the Dabhol power plant would pool money to buy it and later sell it when a long-term buyer is found.

Earlier this month Houston-based Enron said it and its other foreign partners are ready to sell their stakes in Dabhol for no less than $1.0 billion, an amount said to be only sufficient to cover their costs and direct financial investment in the project.

Enron owns 65 per cent of Dabhol, while the US conglomerate General Electric and construction firm Bechtel each own 10 per cent. The remaining 15 per cent is held by the Maharashtra State Electricity Board, the nearly bankrupt power distribution monopoly in the state where the plant is located.

The MSEB and Dabhol Power Co have been fighting for almost a year now over unpaid bills for the power provided to the MSEB from the plant's 740 MW first phase commissioned in May 1999, and over the highest per unit cost of that power.

In May the dispute took an ugly turn when DPC issued a preliminary notice to cancel the power purchase agreement with MSEB. The dispute is now the focus of a slew of cases filed in Indian courts, with DPC and the MSEB claiming damages against each other for failing to fulfil contractual obligations.

Lenders

The source said the lenders are determined to finish building the second phase of the project, which is 97 percent complete.

To do so, he said lenders were willing to offer concessions like lowering interest rates or a loan repayment moratorium -- to either a buyer, or to Dabhol if it finishes the project before exiting.

"We are ready for any type of concession, but if banks and financial institutions are to increase their exposure, then we have to be given some kind of guarantees like credit enhancements by the central government," the source said.

Yet he also stressed a final solution cannot be found until the power tariff is reduced and a buyer found for the plant's output.

MSEB, which in 1995 agreed to buy the entire output, now says it cannot afford and does not need the power produced by the nearly complete 1,444 MW second phase.

Efforts by the federal government to find buyers among other Indian states have also failed as none are willing to pay the rates quoted by Dabhol.

Dabhol says even if the plant were to run at peak efficiency above 90 per cent of capacity, it could not afford to charge less than about Rs 4.5 per unit.

Power that costly has found no buyers among India's state-run power distributors, many on the verge of bankruptcy because of rampant power theft and the provision of power virtually free to farmers and other politically powerful groups.

The state power boards say they can't afford to pay more than about Rs 2.50 a unit.

"The cost of tariff is the central point. Unless that is lowered, then we won't be able to find a buyer," the bank source said.

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