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COAL INDIA LTD (COALINDIA)

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India Power Producers May Seek Higher Penalty On Coal India

04/17/2012 | 09:44am US/Eastern

--Higher penalty will ensure increased coal supplies by Coal India, power companies say

--Higher supplies from Coal India essential to meet electricity generation targets

--Some companies expect government directives to be enough to push Coal India to raise supplies

(Recasts first paragraph, adds Coal India share price in 6th paragraph, background and context in 2nd to 5th paragraphs, comments from power companies in 8th-12th, 14th and 15th paragraphs)

By Saurabh Chaturvedi

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Major Indian power producers said Tuesday they may seek the federal government's intervention to levy higher penalties on Coal India Ltd. (533278.BY) if the state-run miner fails to meet its supply obligations.

Coal India, the world's largest producer, late Monday agreed to sign fuel-supply agreements with some new power projects within a week but diluted its penalty obligations. The move came after the offices of Prime Minister Manmohan Singh and President Pratibha Patil issued directives to the company to ensure adequate supplies to utilities, though the miner was given a free hand in deciding on penalties.

The government is concerned that any shortfall in supplies by Coal India will have wider ramifications for the economy as the company meets more than 80% of the nation's requirement and because more than half of India's 200 gigawatt power generation capacity runs on coal.

Some power producers are also increasing coal imports as output at Coal India has remained stagnant for the past two years due to delays in environment clearances, heavy rainfall and frequent labor strikes.

Coal India said Monday it will sign supply pacts with power projects that became operational by the end of December and have a total generation capacity of about 28 gigawatt. The pacts stipulate that, if Coal India fails to supply at least 80% of the annual contracted coal, it will pay 0.01% of the value of the shortfall as penalty. That's down sharply from the 40% penalty it is mandated to pay under existing contracts.

Shares of Coal India Tuesday gained 3.2% to INR350.00 in a Mumbai market 1.2% higher as investors cheered news of lower penalty.

But power producers are miffed.

"The company has failed to understand the spirit and intent of the [government] directive," said Ashok Khurana, director general of the Association of Power Producers, which represents private-sector utilities including Tata Power Co. and Reliance Power Ltd.

Jindal Power Ltd. Managing Director R.S. Sharma and GVK Power & Infrastructure Ltd. (532708.BY) Chief Financial Officer Isaac George said they will ask the government to implement tougher penalties on Coal India. George added that such pacts were "unfair."

Jindal Power, a wholly owned unit of Jindal Steel & Power Ltd. (532286.BY), has a generation capacity of about three gigawatt, which it aims to raise to five gigawatt by 2015. GVK Power is building 2.8 GW electricity generation capacity.

Some utilities are, however, hoping that Coal India will boost supplies.

"We should think positive and expect Coal India to meet its fuel supply agreement targets," NTPC Ltd. (532555.BY) Chairman Arup Roy Choudhury said.

State-run NTPC, India's largest power producer, plans to almost double its electricity generation capacity to 66 GW by March 2017.

Gagan Banga, a spokesman for the Indiabulls group, which is building more than five gigawatt of power projects, agreed with Choudhury.

Banga said that the supply pacts can't just be "a hogwash" as Coal India is acting on a presidential directive and that he thinks the company will work toward meeting the supply commitment.

The government directive to Coal India has also raised concern among some minority shareholders. U.K.-based The Children's Investment Fund Management has opposed the government clauses on assured supplies to customers saying these were against the interest of Coal India given the slow growth in its output. It didn't immediately reply to an email from Dow Jones Newswires seeking comment for this article.

Kameswara Rao, executive director and leader of the energy, utilities, and mining vertical at PricewaterhouseCoopers India, said Coal India has to balance the interest of the Indian government, which is its majority shareholder, and also its minority stakeholders.

"As a listed company Coal India needs to consider broader investor interest," Rao said. "But with the government being the single-largest shareholder, it needs to balance both issues."

-By Saurabh Chaturvedi, Dow Jones Newswires; +91-11-4356-3304; saurabh.chaturvedi@dowjones.com

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