Financial Daily from THE HINDU group of publications
Thursday, Jul 11, 2002
Industry & Economy
Cash flow risk cover sought for Nagarjuna power project
BANGALORE, July 10
THE Nagarjuna group has sought insurance coverage against cash flow risks for its proposed 1015 mw power project near Mangalore.
Sources said that discussions have already been held with some of the public sector insurance companies. Company officials confirmed that such a proposal had indeed been made.
This risk cover would be somewhat identical to the advanced loss of profit (ALOP) cover offered by the general insurers currently.
However, in the case of ALOP, the risk cover is only against loss during the construction period, due to delayed project commissioning/erection and technical faults in plant and equipment.
But the sources said, none of the general insurance companies have such a product in their portfolio. Accordingly, such a product would need to be developed. Internationally cash flow risk products are already available. However, none of the private sector general insurers have introduced such a product into their portfolio of risk covers.
The sources said that among the major issues that would need to be sorted out for the development of cash flow risk products would be the pricing and assignability of the underlying financial security packages.
Power projects, are backed by a three-tier financial security package, which includes a letter of credit, an escrow account by the bulk power purchasers and a sub-sovereign guarantee.
Consequently, claims are likely to be only if the payments by the bulk power buyers are delayed.
Accordingly, some of the covenants would have to be assigned to the insurer, during the term of the policy or in the event of it being invoked, the sources said.
They said that availability of cash flow risk projects would enhance the financial security to project investors and long term debt financiers, particularly financial institutions (FIs ), especially for projects funded through a limited recourse/ non recourse basis. Project financiers currently have to rely exclusively on cash flows or escrow accounts for meeting the debt servicing payments.
The Nagarjuna group's power project is coal fired and currently awaiting final clearance from the State Cabinet after which the project is expected to go into the financial closure stage. This project has been slotted for the 10th Five Year Plan sinceit has achieved all the statutory approvals and cleared all the major legal hurdles.
The approved cost of the project is currently in the region of about $1.15 billion to be funded through a 70:30 debt equity ratio.
The equity in the project is estimated at $102 million from Nagarjuna Fertilisers and another $41.88 million from a Hong-Kong based company, Fireseed Ltd.
The short-listed Engineering Procurement and Construction Contractors to the project and other unnamed foreign investors are expected to bring in another $248 million by way of equity.
NPCL's first year on basis of commissioning in 2006-07 tariff is currently estimated to be in the region of Rs 3 a unit, based on current trend in coal prices. The company has already tied up its fuel supply agreements with international energy traders, Glencore, Warkworth of South Africa. Further efforts are also on for sourcing coal from China in a bid to bring tariffs down further.
Coal requirement for the project working at 80 per cent load factor is estimated to be in the region of a 1.5 million tonnes per annum assuming a calorific value of 3000 kilo cals per kg.
If the boilers are fired using Chinese coal, the power tariffs would come down further closer to about Rs 2.80 a unit, making it one of the most competitive power projects.
Further sources said, the downtrend in both domestic and international interest rates would have positive impact on tariffs, bring it even lower than what has already been estimated.
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