Judgment in line with Expectations: The judgment is in line with our expectations expressed in the commentary Government Action Key Post Supreme Court's Coal Block Ruling dated 27 August 2014. Ind-Ra stated the possibility of a penalty linked to the total quantity mined. The agency had also highlighted the possibility of the government considering means to provide coal through the linkage route for operational plants if captive coal blocks (CCBs) were to be de-allocated.
Government Action Key for Operational Mines: Ind-Ra expects the government to play a pivotal role in the resolution of coal supplies linked to operational end use projects (EUP). There exist three possibilities which could mitigate the impact of the de-allocation for operational EUPs. Firstly, the government could consider assigning coal linkages to EUPs through Coal India Limited (CIL). However, the ability to obtain coal linkage from CIL remains limited as the company is already struggling to increase its output. Even if the output is increased, CIL will prefer to supply to the existing plants to avoid penalty due to under-supply.
Secondly, if the cost economics of the EUP allow, the developers could look at sourcing imported coal. Lastly, fast track auctioning of the de-allocated mines could alleviate the concerns. The agency opines that these players would try to bid aggressively in the auction to regain the same mines. However, the amount paid to get these mines through the auction route would alter the project economics. The outcome could also be a mix of these three possibilities.
SC has refrained from immediate de-allocation of the operational CCBs with linked EUP. It has allowed a breathing period of six months ending 31 March 2015 to developers. Also, SC has imposed a levy of INR295/tonne for coal extracted by the developers till date. Ind-Ra expects that till March 2015, these operational projects would have to develop an interim arrangement to source coal through government support.
Investments at Risk for Non-operational Mines: Mine allottees with non-operational CCBs face the risk of investments towards mine development as well as EUP being written down. Once the CCB auction begins, there remains limited possibility for the same mine to be re-allocated to the respective developer. Therefore, the investment made towards the mine will largely have to be written off, in the absence of any compensation from the new bidder of the said mine. Additionally, the investments made in EUP could be written off if the developer is unsuccessful in bidding for mines under auction mechanism or imported coal does not support economical operations of the EUP.
The non-operational CCBs have been de-allocated with immediate effect. For such CCBs, there has been no explicit penalty on allottees in the judgment. However, some of the developers had already borne penalties in the form of bank guarantee invocation during the review by inter-ministerial committee in 2013 based on the progress of the CCBs.
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Merchant Power Plants Worst Impacted: Independent power producers (IPP) with merchant sales are likely to see significant profitability erosion FY16 onwards in the absence of coal linkage beyond March 2015; they will have to rely on imported coal or pay higher for the coal obtained under the auction mechanism. FY15 would see a one-time cash flow hit on such IPP's due to the penalty to be paid for coal extracted till date. The ability of these merchant IPPs to tie up for domestic coal under linkage route remains remote.
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