Sei sulla pagina 1di 15
Case Studies in Global Business Journalism No. 2 Enron’s Dabhol Power Project in India Prepared

Case Studies in Global Business Journalism No. 2

Enron’s Dabhol Power Project in India

Prepared by Patrick Smith

The Assignment

The sprawling, dramatic story of Enron notwithstanding, this case study focuses sharply on the Dabhol power plant in India, which was to be (had it been completed) the largest foreign investment in Indian history. How and why did Dabhol come to so calamitous an end? What are the implications in such areas as foreign direct investment in developing nations, regulatory control, the role of the state, the extent of corruption, the place of advanced, capital- intensive technologies in such nations as India, and the involvement of the World Bank in endorsing (or refusing to endorse) private investment by large Western multinationals. Pl ease read the accompanying instructions, How to Approach Case Studies in Global Business Journalism, before beginning your work.

This case is fundamentally concerned with national development strategies and is intended to raise complex questions across a range of issues. Your assignment is to weigh these questions according to what you judge to be their significance and develop a considerably involved piece of journalism that addresses them without sacrificing either clarity or complexity. The questions suggested include, but are not limited to, those that follow:

What role does intellectual fashion play in how nations respond to the challenges of economic development?

To what extent do developing nations depend upon the expertise of advanced economies due to a shortage of human and intellectual resources on their part?

How has the role of the state in developing economies been influenced by multilateral institutions such as the World Bank and has this influence been properly and objectively deployed?

How can developing nations forge healthy relationships with large Western multinationals making direct investments and can such questions as technology transfer, technological superiority, and regulation be balanced. If so, what would this balance look like?

The Dabhol Power Co.

The Dabhol power project, located south of Mumbai, was first agreed in mid– 1992 in response to a critical shortage of electric power in India. The project, with an initial price tag of US$2.5 billion, represented the largest foreign investment in Indian history. The foreign partners were three, all of them American: Enron, the now - defunct energy conglomerate, functioned as the project manager; General Electric was to supply the power- generating turbines, and Bechtel was to construct the

plant. Enron Power Development Corp. was to hold an 80 percent interest in the company; its partners would hold 10 percent each.

Dabhol was initially designed with a generation capacity of slightly more than 2,000 megawatts of electric power. In an agreement reached in 1993, 90 percent of this power was to be purchased by the Maharashtra State Electricity Board, the state - run power supplier for the industrialized west coast of India, where Dabhol was located. The tariff formula in this agreement set the price of Dabhol’s power so as to guarantee investors an initial return on equity of 16 percent; these returns were to be calculated in U.S. dollars. New Delhi issued guarantees, in December 1994, backing the electricity board's purchasing commitments— a ste p that made the Dabhol project attractive to banks considering project finance. The tariff guarantee thus exposed both the board and the Indian government to fluctuations in foreign - exchange rates and the prices of imported fuels.

The Dabhol plant was to be developed in two stages. Phase One would initially be powered on naphtha and produce 740 MW of electricity at full capacity. It was due to be completed in early 1997. Phase Two was to run on liquefied natural gas and generate about 1,300 MW of electricity at full operation when it was completed about a year and a half later. The LNG for Phase Two was to come via pipeline from a tanker terminal constructed adjacent to the Dabhol power- generating site. Phase One was eventually to switch to LNG.

Phase One construction began in 1992. Long before it was completed, however, the Dabhol Power Co. began to run into problems across a range of issues. Economists, energy specialists, government officials, environmentalists, and others began to question the terms of the transaction, the costs of the plant and the power it would produce, as well as the plant’s impact on the environment. In July 1993, the World Bank, which had initially supported the Dabhol project, first signaled its misgivings; it would later decline to participate in financing for Dabhol and join critics in asserting that the project was too costly and that the terms of the contract were too generous to the U.S. investors.

In 1995, the governing Congress Party was replaced in Maharashtra state by Hindu nationalists, many of whom took an ideological position against foreign investment. Local animosities were also unabated at this time; human rights organizations alleged abuses associated with maintaining security at the project site. It was also becoming clear that Dabhol’s power would come at an uncompetitive price and that the electricity board would not be able to afford to purchase it without passing on significant rate increases to consumers. Reports at this time also began to question whether New Delhi would honor the guarantees it had extended in support of the board.

Charges of widespread corruption were another problem besetting Dabhol. Dabhol had been designated a “fast- track” project that is, it was given swift approval by the Indian governm ent — and critics alleged that officials in New Delhi, including some in ministerial positions, had supported the Dabhol plant, including its guarantee of high returns to investors, without due diligence and, in some cases, in return for kickbacks. More broa dly, it was alleged that India had exercised vastly too little oversight, relying on Western investors as an effective assurance of the project’s viability and efficiency. This lent opposition to the Dabhol project, which had spread across India, a nationalist tinge.

In May 1995, the Maharashtra state government announced that it would review the project. New Delhi swiftly announced that all negotiations for “IPPs”independent power projects, of which many were under consideration— would be postponed pending the outcome of the state’s review. That August, Maharashtra’s chief minister announced that the state would shut down Phase One construction at Dabhol and cancel Phase Two altogether. This prompted renewed talks between Dabhol Power and the Indian authorities. The project’s capacity was increased to 2,184 MW, the

capital cost was reduced and the price Dabhol Power would initially charge the electricity board was renegotiated.

These negotiations were concluded with renewed commitments to both phases of the Dabhol project. In late 1996, work resumed on Phase One. The naphtha - powered part of the project began generating power in May 1999, about two years behind schedule. Phase Two construction was under way by this time.

There were numerous methods of measuring the cost of power from the Dabhol plant because many variables were used: different units of electricity, different time intervals, different currencies, and different points in the fluctuating scale between peak, average, and low demand. However, after its first year of operation, Dabhol Power’s critics were proven correct by any measure. In May 2000, it was reported that the average unit cost of power the board purchased from all suppliers was 45 percent lower than Dabhol’s tariff; the cost of power th e board generated at its own plants was 70 percent lower, and the price the board paid to Tata Electric, another private - sector supplier, was 52 percent lower than Dabhol charged.

At the end of 2000, Maharashtra state officials asked Enron to renegotiate its contracts with Dabhol Power for the second time since the project’s launch. By that time, rising fuel costs and a declining rupee had sent the cost of Dabhol’s electricity, in local- currency terms, to two to three times the initial projections.

In ea rly 2001, the electricity board stopped making scheduled payments to Dabhol Power and stopped buying electricity from the plant. Under the terms of its agreement, the board was required to continue making payments to the company regardless of whether it consumed any of its electricity. In March of the same year, Dabhol invoked the central government’s guarantees to back the board’s obligations. Two months later, with the board’s bills still unpaid, Enron announced its intention to abandon the Dabhol project and withdraw from India. At the time, Phase Two of the project was about 95 percent complete.

The Dabhol plant subsequently ceased generating power. Enron itself collapsed in late 2001.

Dabhol Power was eventually purchased and restarted by Ratnagiri Gas and Power Private Ltd., a company in which two state enterprises, the National Thermal Power Corp. and the Gas Authority of India, have shareholdings. As of mid– 2008, the plant was generating 350 MW to 570 MW of electricity. One cause of Dabhol’s low output relative to installed capacity, company officials said, was that General Electric’s turbines were of faulty design an assertion GE denied.

Web references:

World Bank inventory of its documents on Dabhol :

http://extsearch.worldbank.org/servlet/SiteSearchServlet?q=Dabhol

Report o n violence at the Dabhol plant :

http://www.multinationalmonitor.org/hyper/m m0997.04.html

An extended study of the Dabhol project from the perspective of a critical Indian economist :

Mehta, Abhay. 2000. Power Play . Orient Longman publishers

A review and discussion of the a bove - noted book can be found at http://www.indiatogether.org/reviews/powerplay.htm

A collection of domestic press cuttings on the Dabhol project :

www. altindia. net/ enron/ Press. html

A respe cted nongovernmental organization with a focus on Indian energy issues:

http://www.prayaspune.org/

Dabhol’s Overseas Investors

Enron

Enron Corp. was a diversified energy company with interests and trading activities across the globe in a wide range of energy - and commodity- related industries. At its peak, at the turn of the new century, it reported revenue of slightly more than $100 billion. As reported, these derived primarily from natural gas supplies and distrib ution (50 percent), electricity generation and transmission (33 percent), and metals (9 percent).

Enron’s corporate roots extended back to a natural gas company founded in Omaha, Nebraska, in the early 1930s. In the mid– 1980s, the corporate descendant of this company purchased a small Texas concern called Houston Natural Gas. Under a dynamic chief executive named Kenneth Lay, HNG became Enron and reinvented itself. Northern Natural Gas, the Omaha company, became one of Enron’s most reliably profitable assets.

Under Lay’s direction, Enron’s reach extended far beyond the natural gas industry. It became a leading trader in the markets for petroleum, petrochemicals and plastic; pulp and paper; and steel and water. It also traded in a variety of capital markets products. It eventually created an online trading system that developed into a global platform for commodities brokers. Enron moved into broadband services, risk - management services, project development, and project - management services. Among its fixed assets were utilities, paper and pulp - processing plants, and extensive pipeline networks.

During its high- growth years, Enron acquired a reputation as an extremely aggressive player in its chosen markets— markets it sometimes created. In 2000- 01, for instance , Enron was among the wholesalers alleged to have manipulated California’s energy market when partial deregulation opened to the door to such manipulation.

Power generation— the construction of plants such as Dabhol and the management of their operations once completed— was a key part of the new Enron. By the end of the 1990s, it owned, had an interest in, or operated nearly 40 plants worldwide. Dabhol was among the largest. Others were in the American Pacific Northwest, Latin America, Europe, and elsewhere in Asia.

By its own account, Enron grew at an extraordinary pace. In the three years ended December 31, 2000, the company’s stated revenues tripled. Its stock price peaked the following summer at $90 per share. That year, 2001, Fortune magazine named Enron “America’s most innovative company” for the sixth consecutive year.

Even as its stock price peaked, however, Wall Street analysts had grown increasingly concerned that the company’s apparently high growth masked critical weaknesses. The scandal that eventually brought the company down concerned Enron’s accounting methods. Assets and profits were found to be significantly inflated, in part by the use of a technique known as “mark to market” — that is, by listing assets in financial statements according to t heir potential profitability. Debts and losses, conversely, were recorded in the accounts of companies that functioned in essence as holding tanks for Enron’s failed investments and liabilities.

Enron declared bankruptcy in December 2001. Lay resigned in 2003 and was indicted on 11 counts of fraud the following year. He was convicted on 10 counts and died just before his sentencing in 2006. Jeffrey Skilling, Enron’s president under Lay, is now serving a 24 - year sentence. Arthur

Andersen, Enron’s accountant s and formerly one of the “big five” U.S. accounting firms, ceased operations in 2002. What remained of Enron no longer owned any assets by 2006. In 2007, Enron changed its name to the Enron Creditors Recovery Corp.

General Electric

General Electric Co. is engaged in a variety of infrastructure, technology, and financing activities around the world. It has operations in 15 countries in the Asia - Pacific region, 10 in the Middle East, and seven in Latin America, in addition to its interests throughout North A merica and Europe. For the 2008 fiscal year, ended December 31, it announced consolidated revenue of $183 billion and income from continuing operations of $18.1 billion.

GE was founded in 1892, when the Edison General Electric Co., then two years old, merged with a competitor. GE is now a leader in home appliances, aviation services, power- distribution equipment, commercial and consumer finance, nuclear power, media, rail equipment, water- treatment technology, and medical equipment. In mid– 2009 it had an order book in goods and services of $172 billion.

GE has been active in India for more than a century. It built the nation’s first hydroelectric plant in 1902. It does not appear that the company’s activities in India have been adversely affected by the difficulties of the Dabhol project. GE employs more than 12,000 people in India and stated its revenues from Indian operations in 2008 at approximately $2.6 billion. It participated in the development of the business- outsourcing industry in the late 1990s and opened a technology research center in Bangalore in 1999. It does not have a project that approaches the scale of Dabhol currently on the books of its Indian operations.

Bechtel

Bechtel Corp. ranks among the world’s most prominent engineering and construction companies. While about 40 percent of its business is in the United States, it is active in some 50 countries and employs 44,000 people worldwide. Bechtel is privately owned and is not obliged to present financial statements as public companies do; it does not. In its financial overview for 2008, it reported revenues of $31.4 billion, and new work booked during the year worth $35 billion; it did not disclose income.

Bechtel was founded in San Francisco in 1898. From its earliest days, it has focuse d on large- scale projects such as dams, railroads, bridges, ports, water systems, and other basic infrastructure facilities. In part reflecting this focus, the company also has a long tradition of doing business with governments. Today the company is structured into units that grew out of its business as it evolved in the last century. Bechtel National is dedicated to U.S. government contracts in defense, aviation, environmental projects, and “demilitarization.” Its Civil Unit manages the core of its origin al construction and engineering activities. There are also business units dedicated to mining and metals projects; oil, gas, and chemicals projects; and electric- power projects, including nuclear- powered generation plants.

Close connections with governments have been characteristic of Bechtel’s corporate culture. One of the company’s early partners, John McCone, went on to head the Atomic Energy Commission and later the Central Intelligence Agency. George P. Schultz and the late Casper Weinberger, who served in the Reagan administration as secretaries of state and defense, respectively, were both former Bechtel directors.

Perhaps reflecting its unusually close ties to government, Bechtel has faced charges of corruption, price- padding, and the like at intervals since its participation in war- related construction projects in

the 1940s. Some of these charges have led to convictions. In the late 1970s, it was investigated on suspicion that it had bribed South Korean officials to win contracts to construct nucle ar power plants just as the nation was deciding to make a major shift into nuclear generation. In the late 1990s, Bechtel became involved in a consortium commissioned to privatize the water supply in one of Bolivia’s largest cities. The La Paz government w as eventually force to withdraw the contract after substantial increases in water tariffs led to widespread protests and, in turn, martial law. Shortly after the U.S. invasion of Iraq in 2003, the U.S. government, via the State Department's Agency for International Development, awarded Bechtel a construction contract in Iraq valued at almost $700 million. Some of the projects that came under this contract eventually failed. Bechtel was also alleged to have deprived Iraqis of the technology to operate the pr ojects.

Bechtel had nearly half a century’s experience in power - plant construction when it joined Enron and GE to develop the Dabhol site. It now has two projects in India. In 2000, it contracted with Reliance Industries to build a refining and petrochemical complex in Jamnagar in northwest India; it later expanded that facility. In 2005, it began work on a second refinery that doubled Jamnagar’s capacity to 1.2 million barrels per day, making it the world’s largest refinery complex. Bechtel’s other interest in India is the management of a gas field under development off the nation’s east coast.

Web references

A profile of Enron provided by Hoov ers, the corporate - data service :

http://www.hoovers.com/enron/ -- ID -- /free - co - profile.xhtml

10521

Statistical data on Enron’s financials, historically:

http://www.mergentonline.com/compdetail.asp?company=6125&type=financials&DataType=As

Reported&DataPeriod=Annuals&DataArea=PL&DataRange=3&Currency=AsRep&Scale=AsRep&Subm

it=Refresh

General Electric’s annual report for the 2008 fiscal year:

http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf

Bechtel’s annual report for the 2009 fiscal year:

http://www.bechtel.com/assets/files/news/Annual - Report - 2009.pdf

An article on the web site of a publication dedicated to investigating and monitoring global corporate activity. The site provides access to archives and indexed reports:

http://www.multinationalmonitor.org/mm2005/112005/weissman.html

India's Political Economy

India’s economy has been marked since independence by the presence of an unusually large public sector. This reflected judgments made by the nation’s founders even before independence was achieved in 1947. India was impoverished— it still accounts for approximately 40 percent of the world’s poor —and it was primarily agrarian. Capital formation was weak, and industrial development at a very early stage. In these circumstances, the first governments of independent India adopted a strategy whereby the state sector would play a leading role in economic development. Industrial policy resolutions passed into law in 1948, and again in 1956, called for public sector enterprisesknown as PSUs, or public sector undertakings to develop the core sectors of a modern economy.

Two other dimensions of India’s political economy were to color its policy decisions for the first four- and- a - half decades following independence. One was the ideological value attached to a prominent public sector. India’s founders were adherents of the Fabian socialism fashionable in Britain in the early decades of the 20th century. Sta te ownership of strategic assets was a cornerstone of this economic approach; it took on the aspect of a core political belief. The other notable feature of the early political economy was India’s strong attachment to its independence after centuries of fo reign domination. This led, following the economic fashion of the era, to a broad policy of import substitution. In simple terms, India would dedicate itself to making what it needed rather than importing it from abroad; foreign investment was, relative to its place in comparable economies, assigned a low priority.

In 1951, when India announced its first Five - Year Plan, there were five Central Public Sector Enterprises; in 1990, there were 244. These operated in a broad range of sectors, including manufactu ring; steel, heavy equipment, and machine tools; utilities; pharmaceuticals and petrochemicals; petroleum; telecommunications; trade; and tourism. In 1990, India’s state sector, including many enterprises not classified as CPSEs, still accounted for an unu sually large percentage of the economy when compared with other nations in its GDP or per- capita - income category.

The following year marked a fundamental turning point in Indian economic thinking. The immediate circumstances prompting this shift were a severe balance- of- payments crisis and a critical fiscal deficit. In this context, the government launched its New Economic Policy. Its immediate aim was to counter the country’s twin crises; more broadly, the policy was intended to introduce structural adjustments into the economy. As import substitution had once been the economic fashion, at this time neoliberal market solutions were. The NEP reflected this trend.

Privatization in the state sector and the opening of industries previously the preserve of public- sector enterprises were key parts of the NEP. Privatizations proceeded slowly. The first major transaction — the government’s sale of a 51 percent share of the Bharat Aluminium Co.— did not go through until 2001. Other planned asset sales have been delayed by litigation. In 2004, the Congress Party was returned to power. It swiftly reversed the previous government’s plans to privatize a broad range of state - owned companies. In late 2009, another plan to privatize a range of state companies, chiefly by selling stakes of 10 percent to the public, was announced.

The opening of economic sectors to private investment, including foreign investment, proceeded more swiftly. Electric power generation was among the first economic sectors to be opened to private investment after the NEP was announced. Inefficiencies in the state sector were widely criticized in the years that followed. However, the state sector, including many state electricity boards, has been substantially reformed since the mid– 1990s. Some electricity boards are now developing strategies that incorporate alternative sources of energy such as wind and solar to reduce, at least modestly, their heavy reliance on coal. More broadly, the managements of state- owned companies have been given greater autonomy and made more responsible for competing in liberalized markets. Loss- making CPSEs fell from 100 in 1997 to fewer than 60 in 2007. Many CPSEs, it is now acknowledged, are performing well. In 2009, there were 246 CPSEs, up marginally from their number when the New Economic Policy was announced.

Web references

An American web site providing o verviews of national economies http://www.economywatch.com/indianeconomy/in dian - economy - overview.html

A second overview of the Indian economy provided by an Indian web site:

http://www.ibef.org/economy/economyoverview.aspx

A critique of India’s neoliberal economic reforms published in the mid - 1990s:

http://www.multinationalmonitor.org/hyper/mm0795.04.html

An analysis by two Indian economists of the government’s privatization policies, published in

2003:

http://www2.ssc.upenn.edu/about/PrivatizationKapurRamamurti.pdf

A scholarly paper, written by an Indian economist, on the structure and evolution of the Indian public sector:

http://dpe.nic.in/newpayrevision/Chapter - 1 - Overview%20&%20Profile_Final.pdf

Dabhol and the Indian Power Grid

The Dabhol project had an emblematic character in India from its inception. In 1991, P.V. Narasimha Rao was elected prime minister and quickly began to move India toward a major economic shift away from postwar concepts such as import substitution and the necessity of state participation in key industries. Privatization, in the new environment, became a much- discussed theme among Indians in government and in the business community. Western investors and Western institutions tended to encourage India’s new thinking.

The privatization theme was especial ly pronounced in sectors such as power generation, where there were chronic supply shortfalls and strained finances. Foreign investment was also considered in a new light. In 1992, a year after the new government took office, New Delhi announced that the p ower, petroleum, and telecommunications sectors would be opened to private investment for the first time. Memoranda of understanding in the Dabhol deal were exchanged shortly thereafter. It was widely considered the model for what would come to eight “fast - track” projects intended to boost India’s electricity capacity. “The only hope is the private sector,” N.K.P. Salve, the new power minister, said at this time.

There are many ways to measure what was developing into a critical power shortage when the Dabhol project was launched. At the time, India had an installed generating capacity of about 70,000 MW. With wide variations from one segment of the national grid to another, the nation’s power producers ran at an average of 57 percent of capacity. This left India about 20 percent short of power when demand was at its peak. Overall, the country lived with a 9 percent shortfall in its energy needs.

Projections of future demand were not encouraging. As Phase One of Dabhol was under construction, the Five- Year P lan then in force forecast a need for slightly more than 30,000 MW of new capacity at a cost of US$33.4 billion. Against this, the government had approved spending US$24.9 billion, leaving a capital shortfall of roughly US$8.5 billion.

The national budget announced in March 1993 provided for substantial incentives intended to encourage investment in Independent Power Projects. Tax holidays would extend to five years, there would be cuts in customs and excise duties, and New Delhi would increase its spendin g on power projects by 22 percent, to US$1.95 billion for the new fiscal year.

Foreign investors responded with enthusiasm to the Dabhol deal and the government’s liberalization of the power sector. Soon after the Dabhol project was launched, European, American, and Asian companies proposed 41 projects totaling almost 20,000 MW of capacity and US$16.5 billion in capital investment. Nineteen of those projects involved American companies. Eventually,

MOUs were signed for nearly 100 IPPs less than a third of them on the basis of competitive bidding.

Electricity costs and leakage from the national grid were considerable problems for India. The price of power had long been politically sensitive, especially among farmers. Accordingly, state electricity boards suc h as the Maharashtra State Electricity Board paid an average of 1.61 rupees per unit of electricity and charged an average of 1.31 rupees per unit to consumers. In the case of Dabhol, there were many calculations of the price of power the plant would generate; none was less than approximately twice the national average charged to consumers.

In addition to their pricing problems, the state boards suffered chronic losses in the transmission and distribution processes. Officially, poor equipment, corruption, andthe worst of these problems— theft resulted in a loss of 22 percent of generated electricity. Unofficially, the loss was typically put at close to half of all power generated.

At present, India continues to suffer chronic shortages of electricity. Power cuts are commonly reported across the country. In September 2008, the Maharashtra's electricity board warned that shortages of coal supplies and frequent breakdowns at the Dabhol plant could jeopardize its supply of power across the state. At the time, peak demand in Maharashtra had exceeded 15,000 MW on some occasions; against this, the electricity board faced a supply shortage of 4,000 MW to 5,000 MW.

Some IPPs have proceeded, but privatization and large foreign investments are no longer viewed as panaceas or “magic bullets,” as they once were. Instead, India embarked after Dabhol upon a major restructuring of its state electricity boards. In states that adopted this strategy, generation, transmission, and distribution were made into separate operations. Funding from banks and other financial institutions was focused on viable power projects that could deliver power at a competitive market rate.

Appendix I : Enron Financial Data

Source: Mergent Online.

As Reported Annual Income Statement

12/31/20

00

12/31 /19

99

12/31/19

98

Currency

USD

USD

USD

Not

Not

Not

Auditor Status

Qualified

Qualified

Qualified

Consolidated

Yes

Yes

Yes

Scale

Millions

Millions

Millions

Natural gas & other products

50,500

19,536

13,276

E lectricity

33,823

15,238

13,939

Metals

9,234

-

-

Transportation

-

588

627

Other revenues

7,232

4,750

3,418

Total revenues

 

100,789

40,112

31,260

Cost of gas, electricity, metal & other prod

94,517

34,761

26,3 81

Operating expenses

 

3,184

2,996

2,352

Oil & gas exploration expenses

 

-

49

121

Depreciation, depletion & amortization

855

870

827

Taxes, other than income taxes

 

280

193

201

Impairment of long - lived assets

 

-

441

-

Total costs & expenses

 

98,836

39,310

29,882

Operating income

 

1,953

802

1,378

Equity

in

earnings

of

unconsol

 

87

309

97

subsidiaries

Gain on sale of non - merchant assets

146

541

56

Gain on issuance of stock by TNPC, Inc

121

-

-

Interest income

 

212

162

-

Other income, net

 

(37)

181

51

Income bef interest, minority int & inc tax

2,482

1,995

1,582

Interest & related charges, net

 

838

656

550

Dividends on Co - obligated pfd securs of subs

77

76

77

Minority interests

 

154

135

77

Income tax expense

 

434

104

175

Net income before cumulative acctg changes

979

1,024

-

Cumulative effect of accounting changes, net

-

(131)

-

Net income

 

979

893

703

Preferred stock dividends

 

83

66

17

Earnings on common stock

 

896

827

686

Weighted average shares outstanding - basic

736

705

642

Weighted average shares outstanding - diluted

814

769

696

Year end shares outstanding

 

751.628

715.527

662

Earns per share before acctg chng - basic

1.22

1.36

-

Earns per sh - cumul acctg chng - basic

-

(0.19)

-

Net earnings per common share - basic

1.22

1.17

1.07

Earns per share bef acctg chng - diluted

1.12

1.27

-

Earnings per share acctg chng - diluted

-

(0.17)

-

Net earnings per common share - diluted

1.12

1.1

1.01

Dividends per common share

0.5

0.456

0.48

Total number of employees

20,600

17,900

17,800

Number of common sto ckholders

58,920

57,895

58,598

Number of second preferred stockholders

160

182

209

Depreciation, depletion & amortization

855

870

827

Appendix II: The State Government Statement on Dabhol

Text of the Maharashtra state government’s statement on the Dabhol project, delivered by Chief Minister Manohar Joshi at the State Assembly, August 3, 1995. The statement was delivered in Marathi and translated by Reuters.

America's Enron Power Corporation, Bechtel and General Electric ha ve come together and set up Dabhol Power Company (DPC) in India. The state government had signed up with this company on June 20, 1992 to set up the 2,015 megawatt (Base Load) capacity power project at Dabhol in Ratnagiri district in Western Maharashtra. On December 8, 1993, DPC signed a power purchase agreement (PPA) with the State Electricity Board with the consent of the state government. This project will be commissioned in two phases with phase one being set up with imported distillate oil and phase tw o with liquified natural gas (LNG). Phase one will have a capacity of 695 megawatts and phase two of 1,320 megawatts. On completion of the project the entire 2,015 megawatt capacity will be generated using LNG. The total cost of phase one will be 29,120 million rupees ($910 million) and phase two 61,180 million rupees ($1,912 million). The decision to take up phase two is with Maharashtra State Electricity Board (MSEB) as per the terms of the PPA. The financial arrangement for implementing phase two, however, is December 1, 1995 or any other later date convenient to MSEB and DPC.

On December 10, 1994, the state government gave a guarantee to cover up any payment default by MSEB to DPC as per PPA. On September 15, 1994, the central government gave a counter guarantee

for any default by the state government to the extent of unpaid electricity charges and any other damages arising out of contract violations. Towards this a tripartite agreement was signed between the state government, central government and the Reserve Bank of India (RBI) on September 15,

1994.

The Maharashtra government had agreed to provide basic facilities and signed the "Government Cooperation Contract" (June 24, 1994), land lease contract (November 22, 1994) and a contract to construct a jetty (November 23, 1994). The PPA was modified on February 2, 1995. A tripartite agreement was signed on February 25, 1995 between DPC, Enron Fuel International and MSEB on fuel arrangement. The state government on March 1, 1995 issued a letter to DPC on the legal

binding of the contract. Financial arrangements have been completed and the project has commenced and is scheduled to be completed by December 1, 1997.

Power capacity in Maharashtra state as on March 31, 1995 is 11,582 megawatts with a provision b eing made by MSEB for an additional 7,906 megawatts in 1994- 95. According to the power survey report put out by the central government in July 1995 peak demand by the year 2002 will be 13,147 megawatts. To provide this, installed capacity should be 20,500 megawatt. Keeping these facts in mind the state government will have to undertake multiple power projects. However, the government's financial constraints will be a stumbling block in financing these projects. It is important for the state government to ta ke advantage of private participation in the power sector which was initiated by the liberalisation programme. Projects generating 4,417 megawatts are under consideration. These include Dabhol (2,015 MW), Nagothane (410 MW), Khaperkheda (New 500 MW, old 420 MW) and Bhadravati (1,072 MW). Contracts for Nagothane and Khaperkheda were awarded after competitive bidding and discussions on these projects are underway with MSEB. Similarly for Bhadravati project the state government had issued a clearance and discussions are on the PPA. Dabhol project is the only one of its kind where construction work is already underway and if completed on schedule will generate 695 megawatts by December 1, 1997.

There were agitations against the Dabhol project and there is no section of society which do not feel strongly about it. To keep its election promises the Shiv- Sena Bharatiya Janata Party (BJP) decided to review the project. After the Central government opened up Energy to private participation three senior officials of t he Central government travelled to America and Europe to invite investments. After returning from this tour, the Energy secretary, on June 10, 1992, told officials of MSEB that a team of Enron officials will visit the state and asked them to show suitable sites. An Enron team toured Maharashtra in the second week of June, 1992 and a MOU was signed on June 20, 1992. The speed at which the MOU was signed is like "Enron came, saw and conquered". The World Bank and Central Electricity Authority (CEA) termed this MOU as one - sided in their letters dated July 8, 1992 and July 26, 1992.

Five irregular points regarding the Enron deal:

not inviting competitive bids

lack of transparency

environmental aspects not given adequate consideration

approving unnecessarily massive costs for the project

rising costs of electricity due to the project not conducive to the state and the consumers

The previous state government entered into a one- to- one contract with Enron through private negotiations and committed the state to a financially expensive proposition. In the common interest, it is a common practice to invite participation by many players. There has been no satisfactory explanation as to why other foreign parties were not given a chance. It would have served the state's interests best if three or four participants were invited to bid. It is surprising that the central government on the one hand is dismantling trade barriers and subjecting domestic industry to foreign competition to provide more value for the consumer. On the other hand even minimal competition is not there in the Power sector. The reasons are not difficult to fathom.

In my opinion even if there were two competitors for the Dabhol project the outcome would have been much better. At least the government would have had a basis for comparison. As competitive bids were not invited Enron appears to have a complete say.

Even after going through the papers at MSEB and the state govern ment files, I do not know what actually transpired in the deal. I am aware t hat various courts in India have absolved all involved

parties of any irregularity in the entire Enron deal. The courts have also stated that it is not illegal to invite only a single party to quote. However, when it comes to spending public money it is im perative to have competitive bidding for the sake of transparency. The central government has subsequently realised this mistake and issued strict guidelines for multiple parties tendering for any contract. The wall of secrecy raised by Enron, has also bee n exposed by our government making available a copy of PPA and other related contracts to the general public.

The people of Maharashtra are aware of the hazards to the environment. The people of Dabhol feel that the impact of pollution on the lives and means of livelihood of ordinary people should have been given more consideration. The fear in the minds of people has increa sed although the project work has commenced and local employment has increased. More thought should have gone into the attempts to mak e Konkan (the coastal region where Dabhol is situated) into a California. Thought has also not gone into the fuel used, namely distillates and LNG instead of Coal or any other fuel.

The most mysterious part of the project is the cost estimation of 44.9 million rupees per MW in

fixed coats. Dabhol is the only project in the country to use imported LNG. Therefore, it is impossible to compare it with other projects. Excluding costs for storage, port facilities and other onetime costs, the Phase One will cost 37.60 million rupees for every megawatt and 35.70 million rupees for the entire project. The Gandhar project, in comparison, coming up in the neighbouring Gujarat state will cost 37.6 million rupees. The Kathalgutti project commissioned in March 1995 cost 41.5 million rupees which is comparable to the Dabhol project. While doing the financial evaluation of the Dabhol project the Industrial Development Bank of India (IDBI) took into account

a report submitted by consultants Stone & Webster. This report stated that the project cost of the

DPC was comparable to any other gas fired project in the country. Enough thought has not been given to the composition of long term fixed costs which will eventually influence the final cost to the consumer. Many experts feel that the fixed costs are on the higher side. Despite the fact that gas fired projects are cheaper, the cost of the Dabhol project is higher than coal fired projects. The entire project is a loss making proposition for the state because the previous state govern ment did not negotiate properly.

It has been widely reported that the cost to the consumer will be 2.40 rupees per unit. But this cost

is only 54% of the total cost and it is my estimate that the eventual cost will be in the range of 5.00 rupees per unit. Secondly there is no guarantee that MSEB will be able to obtain the electricity at 2.40 rupees per unit because of two unpredictable elements, the rupee/dollar exchange rate and the cost of imported fuel. On both counts foreign elements will have a greater control and say. It is my impression that in other similar projects in the country, with the passage of time the there is an overall reduction in cost of production. In the case of Dabhol, the cost aspects will rise all the time.

It is the opinion of our government that the five points raised above are the main limitations in the

project. Similarly there are limitations in the new power policy announced by the central govern ment. The govern ment has used the same reference sets used for signing up coal based power projects to sign agreements on gas based projects. This has resulted in unreasonable and untenable benefits being passed on to this project. It is possible to easily maintain a plant load factor of 85% on a gas fired project. Hence, it is unreasonable to assume a plant load factor of 68.5% for a gas fired project and plan return on investment on that basis. The central govern ment has committed returns to the project on a dollar basis and protected the returns from the fluctuations in the foreign exchange market. Because of all kinds of guarantees offered by the state & central governments as well as the Reserve Bank of India, along with a guaranteed offtake by the MSEB, the Dabhol project is an extremely profitable venture for the foreign investors. it is my impression that

the 3 main collaborators who have financed the entire project will on project commissioning sell off at least 50% of the equity for a profit and recover all investment made by them. In that eventuality

the state government will not be in a position to do anything. The interest of the state and the consumer have obviously not been kept in mind while signing the contract.

The Dabhol project has been cleared by various committees in the state government, the central power min istry and Foreign Investment Promotion Board (FIPB). However all these committees ignored the advice of the World Bank which through correspondence in April and June 1993 advised that a project of this size for Maharashtra does not make much sense. This advice was however ignored by the various committees. The bank had further advised that instead of a Base Load Power project, a higher value Intermediate Load project for the entire Western Grid should be considered. I have no doubt that the country and Maharashtra require large foreign investments. The investors also require a reasonable return on investment. However if any government decides to provide more than a reasonable return, the people will not forgive such a government. Keeping the Shiv - Sena Bharat iya Janata Party election promise, all documentation on this project has been put up before the people. The committee set up to review the project looked at all aspect of the project and sought advice from experts. This committee comprised Deputy Chief Minister Mr. Gopinath Mundhe, Revenue Minister Mr. Sudhie Joshi and Industry Minister, Advocate Lilladhar Dhake. After going through all aspects of the project starting from the MOU to the special privileges extended to the project, the committee has come to the conclusion that the project is not in the interest of Maharashtra. The reasons being the excessive investment in fixed costs, uncertainties in the various clauses of the PPA, leading to a high cost to the consumer.

The state cabinet after taking into account factors like future power requirements, existing and planned generating capacities, the gap between the minimum and maximum load has decided that the Enron project has a more than normal fixed cost, rising revenue costs, a return of 29% on investment and has not given enough consideration to the environmental issues. It is therefore not possible to continue with the contract.

In my tour of the United State I have mentioned many times that it is not a case of Maharashtra versus the United States but pertains purely to the DPC. A lot of other American and other foreign companies are investing in Maharashtra and we extending our complete cooperation to them. The Maharashtra government has a lot of privatisation projects in the pipeline and I would request that everybody should participate in these. In my view, the state government has the complete right to make changes in the contract and in many places contracts get cancelled when governments change. In my visit to Canada I was informed of two such contracts being terminated by the succeeding government. So it is wrong to say that what we are doing is something different or something that has never happened anywhere before.

This deal is against the interest of Maharashtra. Accepting this deal would indicate an absolute lack of self respect and would to betraying the trust of the people. Such a contract is not a contract at all. If the government has to bear financial costs it is imperative to reject the deal in the better interest of Maharashtra and its pride. We also plan to investigate the reasons for entering into a contract by the previous government. The current government has decided to instruct the Maharashtra State Electricity Board (MSEB) to take appropriate legal steps. In summary the state government's decision is as under :

1. Cancellation of the Phase Two of the project is within the purview of the state government and

the government has decided in principle to scrap the project. The federal power ministry and MSEB

will be informed shortly of the same.

2. The first phase work we are not interested in continuing and we will instruct Enron to stop work

at the site.

Appendix III : T he Indian economy at a glance

GDP (FY 2008): $1.21 trillion ($1,210 billion).

Real growth rate (2008 est.): 6.6%.

Per capita GDP (PPP, FY 2008): $2,900.

Natural resources: Coal, iron ore, manganese, mica, bauxite, chromite, thorium, limestone, barite, titanium ore, diamonds, crude oil.

Agriculture: 18% of GDP. Products-- wheat, rice, coarse grains, oilseeds, sugar, cot ton, jute, tea.

Industry: 29% of GDP.

Products-- textiles, jute, processed food, steel, machinery, transport equipment, cement, aluminum, fertilizers, mining, petroleum, chemicals, and computer software.

Services and transportation: 54% of GDP.

Trade: Expo rts (FY 2008)-- $176.4 billion; engineering goods, petroleum products, precious stones, cotton apparel and fabrics, gems and jewelry, handicrafts, tea.

Software exports -- $22 billion.

Imports (FY 2008)-- $306 billion; petroleum, machinery and transport equipment, electronic goods, edible oils, fertilizers, chemicals, gold, textiles, iron and steel.

Major trade partners-- U.S., China, U.A.E., EU, Russia, Japan.

Web reference

http://www.state.g ov/r/pa/ei/bgn/3454.htm#econ

Appendix IV: Documentaries

Enron: The Smartest Guys in the Room, by Alex Gibney

The following link leads to a noted 2005 documentary on the rise and fall of Enron. It is based on a 2003 book of the same name written by Bethany McLean and Peter Elkind, who were reporters for Fortune, the business magazine:

http://www.youtube.com/watch?v=o5clNtt7PgM

Windmills of God, by Sudarshan Kumar

The following web link leads to a brief documentary focused on the electricity problems and the search for alternative solutions in one Indian state, Karnataka, which is among the poorer of India’s 28 states. It provides footage of actual conditions in rural areas as well as insights into how state governments and local communities are attempting to surmount critical electricity shortages according to local conditions.

http://video.google.com/videoplay?docid=- 7454691949286757956&hl=en#