Enron: Maybe Megadeals Mean Megarisk

It has been a rough few weeks for Rebecca P. Mark. On Aug. 3, the chairman and chief executive of Enron Corp.'s international-power unit had her biggest deal, in India, abruptly canceled after a state government review. Mark's effort to salvage the $2.8 billion Dabhol project with last-minute promises of concessions only produced scorn from Hindu nationalist politicians. Then, back in the U.S., on a vacation to unwind, she was tossed into a cactus while on a horseback excursion.

Mark, 41, says she has shaken off her setbacks and is confident of resuscitating Enron's contract to build the 2,015-megawatt Dabhol power plant. But the Indian rejection is raising questions about the $9 billion Houston energy giant's global strategy and its hard-charging style. By quickly developing big overseas projects and then selling off stakes, Enron hopes to maintain strong profit growth. But some of its grandest efforts, such as a natural-gas pipeline from Bolivia to Brazil and power plants in Turkey and Indonesia, remain deadlocked over such issues as the price of power, the degree of private ownership, and whether such projects are even viable.

Enron is determined to show that its global push continues unabated. Mark goes to Bolivia soon for talks on the pipeline, and she has already returned to India, where Enron has invested some $200 million, to testify before its Parliament. "We're not sitting here wringing our hands," she explains.

GEOMETRICALLY MESSIER. That message is important to Wall Street, which has pushed Enron's stock down by 10%, to 331/2, in the last two months. Until then, many analysts had considered the stock to be undervalued. Since 1988, Enron's sales have doubled, and earnings have expanded 15% annually for the past four years. Enron had scored big successes in Britain and South America, and a slew of major projects such as Dabhol is in the works. Altogether, Enron is involved in discussions on some $10 billion in power plants and pipelines in South America, Asia, and the Middle East (table). This year, Mark's international unit is expected to contribute $180 million in pretax profits, 16.5% of Enron's total, vs. 4% in 1992.

But as most Western developers are finding, completing megaprojects in emerging markets is enormously more difficult than building small ones. "There is tremendous fear by governments on big projects that they might make a mistake and have to live with it for 15 years," says James J. Steele, chief executive at Houston-based Mosbacher Power Group and a former Enron development executive. China, which with India is expected to account for up to 40% of global growth in power capacity, has delayed dozens of large, privately financed plants over squabbles about investor guarantees and rates of return. Malaysia has even banned new plants to prevent overcapacity.

Enron's Indian Dabhol debacle, however, has been the biggest shocker. When Enron first got involved in May, 1992, the new reformist government led by Prime Minister Narasimha Rao was desperate for foreign investment in infrastructure. A month after meeting touring Indian officials in Houston, Enron sent executives to India. They hammered out a memorandum of understanding in just 10 days to build a massive power complex.

"SHAMBLES." Eighteen months later, the Maharashtra State Electricity Board agreed to buy 90% of the power Dabhol produces. The financial terms and ownership structure "were not ideal" for India, concedes an official in India's power ministry. "When we accepted the project, we were in shambles," he says. "We had no investors."

But Enron made some miscalculations. The most fundamental was political. It didn't take seriously a rising backlash against foreign investments by an opposition coalition led by the Bharatiya Janata Party. During its campaign for state elections in February, 1995, the BJP called for a reevaluation of the Enron project. Instead of waiting for the vote's outcome, Enron rushed to close the deal and began construction--apparently thinking that would make it difficult for a new government to unwind the deal. "Enron just blasted on," says a U.S. State Dept. source familiar with the deal. "Public perception just didn't concern them."

It should have. The BJP coalition won in Maharashtra and quickly fulfilled its promise. "They had pledged to review the project, and not doing so would have been difficult," says Srinivasan Subramanian, chief India representative of stock brokerage HG Asia. The problem was compounded when the U.S. Energy Dept. in June issued a statement warning that killing the Enron deal could adversely affect other power projects. A diplomatic source says Enron "pushed like hell" to get Energy to issue the statement. But Indian politicians immediately attacked the statement as an attempt by Washington to bully India. "These kinds of statements are actually threats, and it didn't help Enron at all," contends BJP economic adviser Jay Dubashi.

Another apparent faux pas was not teaming up with a local partner. Enron's only co-investors were General Electric Co. and Bechtel Group, both U.S. companies. What's more, Enron had quietly arranged to sell a 20% stake in Dabhol to New Orleans-based utility Entergy Corp., which likely would have drawn more fire. Enron officials maintain that the Indian government advised it not to enlist a domestic partner for fear of showing favoritism to certain Indian companies. But the absence of allies created the appearance that the foreigners were milking India.

The deal's secrecy didn't help, either. Dabhol was one of eight plants placed on a "fast track" by New Delhi. Besides getting government loan guarantees, the projects were awarded without competitive bidding. Enron's rate of return was estimated at 23%, far higher than the 16% over capital costs guaranteed to others by the Indian government. Critics also thought the 7.4 cents per kilowatt-hour that Enron would get for the power was high. Enron fought to keep the details confidential, but a successful lawsuit by a Bombay consumer group forced disclosure. When Enron offered to renegotiate to make the power cheaper, critics cited that as proof it had padded costs in the first place.

Enron is having more success building small power plants, such as a 110-Mw facility in Guatemala and two others that already operate in the Philippines, where Enron was a pioneer when most foreign investors shied away out of fear of political risks. And in China, Enron has broken ground on a 150-Mw plant on Hainan Island. "We've been as successful in this business as anyone," says Mark.

DRAGGING ON. But Enron's major focus is on megaprojects, which is what it needs most to meet financial targets and keep investors happy. With gas prices depressed in the U.S., earnings are getting a big boost from sales of its holdings in international-power and pipeline projects. For instance, dividends in Britain's Teesside plant and other projects helped push up net income 24%, to $94 million, in the six months ended June 30. But for this strategy to work, Enron must complete projects and sell off stakes--and do so quickly. With negotiations still dragging on from Indonesia to Turkey to Brazil, it will be a challenge for Enron to maintain its schedule. While the company says it won't take a write-off on Dabhol, it has already held up, if not halted, the sale of a 20% stake to Entergy.

If Enron can't get Dabhol back on track, other important plans could be affected. The company is counting on India to be a primary market for a huge processing plant for liquid natural gas (LNG) that it's building in Qatar. Mobil Oil Corp., which already has a similar plant in Qatar, has rights to the biggest LNG markets, such as Japan and South Korea. Enron says it has enough alternative markets to India, but some analysts are skeptical. Enron also maintains that losing Dabhol won't hurt its growth forecasts. The plunge in its stock, though, shows investors are worried.

Mark isn't giving up on India. She still believes Enron can come to terms with the Maharashtra government. Lately, the BJP has been putting more blame on the ruling Congress Party (I) than the U.S. company for the deal. Many observers in India think the BJP will renegotiate, then use the deal to their political advantage by showing that they managed to broker a fairer contract. But even if Enron can salvage Dabhol, it can ill afford many more complications of the same magnitude.

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