Nagarjuna Fertilisers and Chemicals Ltd (NFCL) has completely exited from the inter-State mega power project under construction in Udupi, Karnataka, selling its 26 per cent stake to the Lanco group. NFCL officials, when contacted, confirmed the exit. The officials said, "There was no premium involved in the divestment as the project was under development. We want to stay focused on the fertiliser and petrochemical business.' The exit is a full circle for the Hyderabad-based Nagarjuna group which had taken over the project from Jayaprakash Engineering and Steel Company (JESCO) in 1995. Lanco had bought out NFCL's 74 per cent stake in May 2006. The project costs were capped by the Central Electricity Regulatory Commission in October 2005 at Rs 4,299.12 crore. A year later financial closure was achieved with the Power Finance Corporation as the lead arranger for the debt funds amounting to Rs 3,440 crore, on the basis of an 80:20 debt-equity ratio. Project re-named NFCL's 26 per cent stake translated to Rs 224 crore. NFCL's exit takes Lanco group's stake to 100 per cent or about Rs 860 crore. Nagarjuna Power Project has now been renamed as the Udupi Power Project . The project has a power purchase agreement for 913.5 MW with Karnataka and another 101.5 MW with Punjab. The purchases by the two States are backed by a three-tier payment security mechanism. Tariff risks NFCL's exit comes at a time when the power project is faced with tariff risks. Tariff risks come from escalation in international coal prices. The project is based entirely on imported coal. Coal requirement is estimated at 3 million tonnes (mt) per annum with a calorific value of 6,200 kilo calories per kg. Initially, the project promoters had entered into a five-year fixed price arrangement with a consortium of coal suppliers. The suppliers included Adaro of Indonesia (1.2 mt), Adityaa Energy Resource Pte Ltd, Singapore (0.5 mt), Banpu Coal of Thailand (0.5 mt) and international energy trader Glencore (0.5 mt). The pricing arrangement then agreed was $50 (cost insurance and freight) per tonne. Accordingly the original estimated levelised tariff was Rs 2.10 per unit over the 30 year license period. Delays However, sources said that the fixed-price agreement was valid only till December 2009. Besides, the suppliers have disallowed any arbitraging. This implied that coal off-take for generation would have to begin by the cut off date. But the project is faced with delays. Estimates provided to the Central Electricity Authority (CEA) indicate that the first unit comprising 600 MW was expected to be commissioned only by May 2010 followed by the second 600 MW unit in September 2010. Consequently, a coal supplier said, the terms would have to be reworked. Coal suppliers are currently at a tremendous advantage in view of the high international prices. International thermal coal prices are currently estimated at upwards of $125 a tonne (Free on Board). FOB prices of low sulphur coal are even higher, closer to about $135 a tonne. Besides, the project's actual requirements are likely to be higher in view of the uprated capacity. Coal requirements were originally estimated on the basis of a project capacity of 1,015 MW at 90 per cent plant load factor. With the project capacity now at 1,200 MW, requirement was likely to go up by another 20 per cent, the sources said. The tariff risks were also partly on account of the higher debt costs. Debt financing is likely to cost about 10.5 per cent plus, or about 200 basis points below the current benchmark prime lending rate. In 2005 the interest cost estimated was 7.25 per cent.