Which firms will get impacted coal pool pricing move?

The government has shelved the proposal to pool prices of imported and domestic coal due to political pressure. Answering a query on which power companies will be impacted by this decision, Salil Garg of India Ratings said, "Only on those power generators or those new Independent Power Producers (IPPs) who are not operating on the cost plus model and those who have either bid on a fixed price basis and they are unable to pass through the increased cost of the imported coal back to the consumers, will be impacted by this decision."

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He further adds companies like Tata Power , Adani Power are unlikely to be impacted because they are not directly dependent on Coal India for coal and their parent companies are strong who might step in to help them..

Below is verbatim transcript of his interview on CNBC-TV18

Q: How have you assessed the no price pooling for coal impact on the power companies? Do you think this is the end of the road and now you will have to assess their profit and loss (P&L) with respect to imported coal prices only? Then what happens, will they be able to survive at all and sell?

A: The impact of this decision will be only on those power generators or those new Independent Power Producers (IPPs) who are not operating on the cost plus model. So even the new IPPs which are operating on the cost plus model will be able to pass through their entire fuel cost to the distribution companies (discoms) and ultimately to the consumers.

Only those new IPPs who have either bid on a fixed price basis and they are unable to pass through the increased cost of the imported coal back to the consumers will be impacted by this decision.

Q: Have you done any analysis on which private producers could be impacted, what quantum of the new IPPs are signed on fixed pass through basis and therefore what the P&L impact would be?

A: It is difficult to quantify the P&L impact at this point of time. As a rough estimate, if 15 percent of the total coal requirement is met through imported coal then per unit cost will be 50-60 paise higher for those particular set of IPPs. The total quantity which could be impacted is roughly 24000 megawatts (MW) which is likely to come up by end of financial year 2015 but the impact will vary from IPP to IPP depending upon the power purchase agreement (PPA) that IPP has or the selling price that IPP has.

Q: Even assuming they are able to pass on the cost, will there be buyers at those higher levels, since so many of the discoms are cash strapped?

A: Yes, it will be difficult to find buyers. In case they are able to show availability, and in case their PPAs allow them to show availability based on imported coal then at least they will be able to recover their fixed charges if not a variable cost. It will help them to some extent to recover their fixed charges.

However, it will be very difficult for the discoms to afford this expensive power and ultimately recover it from the consumers.

As such the discoms are in a financial trouble and they are facing problems in raising tariff time and again. So in case the power purchase cost goes up again for them because of the imported fuel, it will be difficult for them to buy this power or to pay for this power.

Q: Would you say that in a year or so you could see defaults by these companies, Adani Power, Tata Power, and Reliance Power , all the companies involved and dependent on imported power because they cannot find coal from Coal India?

A: The names that you have mentioned are not directly dependent upon Coal India. Some of their power plants are directly dependent upon imported coal or they have their own mines. So it is only those producers who have Letter of Assurance (LOA) from Coal India or who have signed Fuel Supply Agreements (FSAs) with Coal India and are unable to get 100 percent coal from Coal India and have to rely on the imported coal and are unable to pass through that cost to the consumers, only they could face repayment pressures.

So, it will be too difficult to say that these entities will default because many of these entities have got strong parents. So we expect parents might step in to help them.

Q: Which are the companies that you have on your radar as being dependent on Coal India and not getting that expected coal from them?

A: There are large number of entities. Coal India has to sign more than 100 FSAs post 2009, out of which only 61 FSAs have been signed. So out of this about 36,000 megawatt are on a cost plus formula so they will not be impacted.

Q: Can you name some of the companies that perhaps you guys are rating?

A: It will be difficult to name companies that will default or those that could face pressure alike National Thermal Power Corporation ( NTPC ). NTPC has cost plus PPAs so I am sure that NTPC will be able to pass through their cost but it will be difficult to name those companies which will not be able to pass through the costs.