Monday, April 30, 2012

>INDIA UTILITIES: Coal India (CIL) is close to signing fuel supply agreements (FSAs)

Synopsis of draft modified FSAs
• Statutory charges pass through: The wording of the draft modified FSAs stipulates that royalties, cesses, duties, taxes, levies etc if any payable under relevant statue but not included in the base price shall be paid by purchaser. Hence, it appears that the liabilities arising out of the MMDR bill will interpreted as statutory charges and will be pass through in nature. Major positive for CIL

• Introduction of force majeure: CIL’s responsibility stands waived in case of laundry list of events such as flood, adverse geo mining condition, explosions, civil disturbance, strike, legal issues, global issues with respect to coal availability, breakdown et al (it includes almost everything that can possibly impact CIL’s production). Change in statutory laws is included in the clause. Positive for CIL

• Purchaser’s condition precedent to put onus of timely execution on power company: Power companies will have to complete activities within 24 months from the date of signing FSAs as a condition precedent for the formulation of FSAs. This will lead to exclusion of delayed power projects from the list of projects eligible for coal. Moderately positive for CIL

• Import in the event of low domestic availability: CIL shall inform buyer three months in advance in case coal import is required, and the transportation charges from port shall be borne by the purchaser. There is no clarity on pooling of coal costs, however, this will be a pass through for CIL. CIL will announce price of
imported coal from time to time. Positive for CIL

• Negligible incentive for over delivery: Matching the penalty level, incentives are set at 0.01% for delivery in excess of 90% of ACQ. Negative for CIL • Negligible penalty for not meeting FSA: Penalty has been set at 0.01% of FSA value for delivery in case of undersupply. However, we believe that CIL is unlikely to pay any penalty, as it has the option to import coal to meet the domestic shortfall and in case the quantity offered for imported coal is not accepted by the purchaser, there will be no penalty for the shortfall.

• Quality assessment at loading end daily: There will be joint sampling, either manually or mechanically, for moisture, ash, and GCV of coal on a daily basis. The quality assessment will also help in implementing GCV based pricing system. Assessment at loading level is positive for CIL, as transportation related issues are beyond its control. Weighment of coal will be done at loading end. Positive for CIL

• Older FSAs to have priority: Commitments made under prior FSAs and commitments existing under "Coal Distribution System" shall take precedence over commitments made under the current FSAs. Positive for NTPC

• Lack of wagon availability to reduce availability; not to be included for calculation of penalty.

• FSAs fully reviewable by CIL: As per the terms, the FSA can be reviewed by either party after five years. And, nine months after the review, if either of them find the terms unsuitable, they have the right to end the agreement.

• Capacities – Total FSA for 25GW with 104mnte of LoAs (Letter of Assurance). 13.5GW of capacities have linkages with LOAs of 56mnte, which were commissioned in FY12. For FY11, 5.8GW of capacities have LoAs of 23.2 mnte. For FY10, 5.3GW of capacities have LoAs of 24mnte.

To read report in detail: INDIA UTILITIES