The substantial P255.5 billion charges that SMC Global Power faces if it pushes through with its 4 October withdrawal from power supply agreements with Meralco would be immediately demandable, in full.
An industry source said that based on the contract of its two units, South Premiere Power Corp. which operates the Ilijan natural gas plant, and the SMC Energy Corp. which runs the Sual coal plant, SMC Global Power will have only 15 days to raise the amount from the time that Meralco issues a written demand for payment.
If it immediately stops power supply to Meralco, "due to unavailability of supply from its plant, Wholesale Electricity Spot Market, and any other source, the power supplier shall pay a fine equivalent to P908 multiplied by each megawatt-hour during a day."
Moreover, the contract provided that this particular penalty "shall be used to reduce the generation charge to consumers."
While the San Miguel Corp. energy arm is citing the PSA provision on change in circumstances for its threat to withdraw from the Meralco deal, it is likely that "termination upon the event of default" will apply.
SMC Global Power recognizes the possibility of a default in the shelf registration for fixed-rate bonds of P60 billion it filed with the Securities and Exchange Commission.
Based on the PSA, the power supplier is declared in default when an event results in "or is accompanied by an actual failure by Power Supplier to make available the contract capacity and deliver the associated energy, or any portion thereof, to Meralco."
When default happens
Such a default situation takes place when SMC Global Power "fails to perform any material obligation under the agreement, including the making of any payment which is due, which failure has not been remedied within 30 days after receipt from Meralco of a written notice of Power Supplier Event Default."
In documents filed with SEC, SMC Global Power said although the energy conversion agreements for Sual, Ilijan and San Roque contain bonus and penalty provisions, the Company monitors the IPPs' adherence to the minimum operating protocols specified in the IPPA and ECAs, "there is still a risk that the IPPs will fail to satisfactorily perform their respective operations and maintenance obligations."
It added that a material adverse effect may apply to the business, financial condition, and results of operations of SMC Global Power.
If SMC Global Power, through its subsidiaries, fails to generate or deliver electricity beyond contractually agreed periods due to the failure of the IPPs to operate and maintain the power facilities, the counterparties of SMC Global Power in its contracts "may have a right to terminate those contracts for outages beyond applicable outage allowances."
The contract added that if, within 90 days after receipt from Meralco of written notice of Power Supplier Event of Default, Meralco may terminate the agreement and pursue any remedy available to it under this agreement, at law or in equity.
The agreed damage in an event of default is P100,000 per megawatt a day for seven years.
Considering that SMC Global Power will remove 1 gigawatt from the national grid, the penalty totals P255.5 billion.
"Meralco shall be entitled to liquidated damages, instead of all other damages to which it may be entitled in respect of such event of default, in the amount of P100,000 per megawatt per day for the remaining term of the PSA."