Extension of FFC – III GSPA

Comments on Letter from MPCL

 Any revisions in the agreement should be effective from the date of

signing of the agreement.

 New Article 3.03 (a) allows MPCL to fix/reduce gas quota to 90% on
quarterly basis. FFC should not accept any reduction in allocated gas
volume since it would limit production capacity besides resulting in a
lower benchmark quota for future gas allocations. Based on
consumption pattern of 2016, limiting of gas quota to 90% would result
in production loss of approximately 96,000 tonnes of urea.

 Financial impact of increasing the Take-or-Pay threshold from 78.75%

to 90%, based on gas utilization in 2016 is Rs. 5.88 Million. However,
the impact based on gas utilization during turnaround year of 2017,
with allowance for 13 days of shutdown, is Rs. 21.71 Million. Financial
impact at various levels of Take-or-Pay % without setoff based on gas
consumption for the last 3 years is as follows:

Take-or- 2017 2016 2015

Pay % Rs. In Million
78.75% 15.08 1.56 13.07
85.00% 18.22 3.60 15.49
90.00% 21.71 5.88 19.10

 As evident from the above table, in case there is no set-off, the

Company is liable to make payment even on a low Take-or-Pay
threshold of 78.75%. It is hence proposed that a set-off period may be
negotiated as proposed below.
Set-Off
 MPCL has proposed a Take-or-Pay arrangement with no set-off
against the existing allowed set-off period of 4 years. Financial impact
at various set-off periods based on 17 shutdown days (30 days
standard less 13 days allowance as per proposed draft) for all three
plants is tabulated below:

Take-or- Set-Off Period

Pay Plants No Set- 14 1 6 2
1 year
Threshold Off days month months years
Amount (Rs. Million)

Plant-I 188.29 149.62 137.62 62.42 - -

Plant-II 164.01 135.91 101.16 52.12 - -

90%
Plant-III 138.87 133.29 93.88 67.66 30.86 -

Average 163.72 139.61 110.89 60.73 10.29 -

Plant-I 160.76 104.09 94.28 - - -

Plant-II 126.92 101.12 70.22 - - -

85%
Plant-III 129.24 120.86 80.84 - - -

Average 138.97 108.69 81.78 - - -

Plant-I 131.12 72.69 62.87 - - -

Plant-II 98.15 71.80 38.81 - - -

78.75%
Plant-III 117.96 105.64 64.54 - - -

Average 115.74 83.38 55.40 - - -

 Based on the above, after accounting for 13 days of proposed shutdown, a
set-off period of 2 years with Take-or-Pay threshold of around 85%
adequately protects FFC from any liability assuming gas consumption
pattern of 2016. Otherwise, number of days exempt from minimum billing for
planned/unplanned shutdown should be increased to atleast 30-35.

 The agreed set-off period shall be deemed to commence from each

respective day of reduced gas consumption.

 Maximum amount payable under the proposed Take-or-Pay arrangement

may be limited to Rs. 100 million in order to protect FFC from excessive
liability in case it is unable to take gas from MPCL.

 In case GSA is about to end and FFC conducts a turnaround/ shutdown, than
any amount payable cannot be adjusted in future due to termination of GSA
shall either not be charged by MPCL or paid back in cash before termination.

 Any revision in the existing Take-or-Pay or set-off arrangement should be

applicable to all customers of MPCL and effective from the same date to
ensure non-discriminatory treatment.

Loss due to non-supply of Gas by MPCL

 Any set-off provision applicable to FFC should also be applicable to MPCL

in case it does not provide gas.

 The reciprocal arrangement proposed by MPCL in case it supplies less than

the threshold volume is not equitable as it only entitles FFC to a 10%
discount on the shortfall gas that is supplied in subsequent periods. The
arrangement may be amended to entitle FFC to either
o receive the revenue lost due to non-supply of gas currently
standing at around Rs. 1,100/MMBTU
o receive contribution margin lost due to non-supply of gas
o receive the full price of gas that was not supplied currently
standing at Rs. 123.87/MMBTU