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C. Shivkumar

BANGALORE, May 6

THE Nagarjuna group's 1,015-MW power project near Mangalore has now become a reality with the Karnataka Government having cleared the payment security mechanism (PSM), including a State Government guarantee.

The PSM demanded by the project financiers by the Centrally-owned Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) was cleared on Monday, sources said here.

The clearance of the package comes after a protracted legal battle fought by Nagarjuna Power Corporation Ltd (NPCL) after the State Government backed out from providing a guarantee and a bankable PSM.

The NPCL project is the first 1,000-MW green-field power project to come up in the private sector. At the meeting, the State Government has also classified NPCL as a mega project. This would allow the company to benefit from concessional customs duties.

The sources said that the PSM clearance was now likely to see the participation of a strategic partner in the equity of the NPCL project to the extent of 49 per cent.

The three short-listed participants for a strategic equity stake in the project include Steag Incotech of Germany, China Power International Holdings of Hong Kong and Escom from South Africa. Earlier attempts by Cogentrix of the US and later by China Light and Power of Hong Kong along with the Tata group to set up a 1,000-MW plant in Mangalore had ended in a logjam over the issue of a counter guarantee by the Union Government.

They said that the reform-linked package was fully acceptable to the promoters, equity participants, and the project financiers. Under the mechanism cleared by the State Government, the first line of security is to be created by parking of revenues from one of the distribution zones in a designated account to the extent of 1.25 times of the outstanding billing. This would comprise the power reform fund on which the generator would have the first charge. This in turn is to be supported by default charge on transmission revenues.

In the event of the inability of both these agencies to meet the payment dues, the State Government guarantee becomes the final line of security for the lending institutions. The PSM would be activated only in the event of the bulk buyer failing to meet the generating company's payment dues. The sources said the State Government agreed to operationalise the PSM within three months ahead of project commissioning.

NPCL's project has been slotted for commissioning between 2006 and 2007, during the current Plan period. This project when commissioned would be in a position to contribute nearly 7,100 million units a year (19.5 mu per day) assuming a plant load factor of 80 per cent. The first year is estimated at Rs 2.55 a unit, based on the current international coal prices, financing costs and current exchange rates.

The company has already tied up its fuel supply agreements with international energy traders, Glencore International and Warkworth of South Africa. Further efforts are also on for sourcing coal from China to bring down the tariffs further.

Coal requirement for the project working at 80 per cent PLF is estimated to be in the region of a 1.5 million tonnes per annum assuming a calorific value of 3,000 kilo calories per kg. If the boilers were fired using Chinese coal, the power tariffs would come down further close to about Rs 2.40 a unit, making it one of the most competitive power projects.

The sources said that the low tariff influenced the State Government's decision to support the project. The clearance of the PSM now paves the way for the finalisation of the Engineering Procurement and Construction contract (EPC). This now means that NPCL's project is expected to go into financial closure within the next six months.

The CEA approved cost of the project is put at $1.15 billion (Rs 5,440 crore) to be funded through a 70:30 debt equity ratio. The equity in the project estimated at $345 million, would be brought in by the promoter group, including Nagarjuna Fertilisers Ltd. This group is expected to hold 51 per cent stake in the project.

The project debt requirement is estimated to be in the region of Rs 3,800 crore at current exchange rates inclusive of deferred payment guarantees.

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