LHBL wins International Arbitration Award against JGTDS

· LHBL won a favourable Award from the International Arbitration Tribunal against JGTDS regarding dispute about the ceiling price for gas

· The Award is not legally enforceable in Bangladesh and will have no financial benefits for LHBL as the company will continue paying for gas at the BERC rate

· However, LHBL’s management hopes to recover the disputed amount and renegotiate a new ceiling price for gas once the tenure of the current agreement ends in 2025

The International Arbitration Tribunal passed a favourable Award for LafargeHolcim Bangladesh Limited (LHBL) regarding the company’s dispute with Jalalabad Gas Transmission & Distribution Systems Limited (JGTDS) over the ceiling price of gas.

The Award declared the ceiling price for gas as a valid and enforceable provision of LHBL’s Gas Sales Agreement (GSA) with JGTDS. It asserted that LHBL is not obligated to pay past invoices issued by JGTDS at a price exceeding the ceiling price in the GSA. Accordingly, JGTDS was also ordered to pay back the excess sum of BDT 2,275 million that LHBL paid for gas supply up to June 30, 2023.

As per our discussion with company management, the decision of the Tribunal is not locally enforceable. Consequently, LHBL will continue to pay JGTDS at the BERC rate until the tenure of the GSA expires in 2025. LHBL will also continue recording excess gas charges as receivables and reporting fuel costs (as part of cost of sales) at the ceiling price set in the GSA. This will result in its current profit margins being unaffected by this Award and a continuation of its receivables growing.

Summary of the dispute:

LHBL and JGTDS agreed to a ceiling price of BDT 7.91 per cubic meter of gas in January, 2003. However, JGTDS demanded an increase in ceiling price after the Bangladesh Energy Regulatory Commission (BERC) increased gas tariffs to BDT 10.70 per cubic meter for industrial consumers in 2015.

Following a failure to reach an agreement, LHBL issued a Notice of Arbitration against JGTDS in the International Arbitration Tribunal under United Nations Commission for International Trade Law (UNCITRAL) Rules. In the meantime, the Hon’ble High Court issued an interim relief to LHBL by restraining JGTDS from terminating the GSA or stopping gas supply to the plant. Additionally, LHBL was directed to pay to JGTDS all gas bills issued as per the tariff fixed by BERC since the beginning of the dispute.

Impact of the arbitration:

Following the High Court directive in May 2021, LHBL began paying for gas at the industrial gas consumption rate set by BERC. However, LHBL reported fuel costs on its income statement at the ceiling price of BDT 7.91 per cubic meter set in the GSA. Any tariff paid in excess of this was accounted for as a receivable, with the expectation that the disputed amount will be recovered. As the International Arbitration Tribunal’s Award is not locally enforceable, LHBL will continue using this method to account for gas costs during the tenure of the GSA.

However, LHBL’s management expects to recover these receivables and renegotiate the ceiling price for gas with JGTDS once the current agreement expires in 2025 and a new agreement is drawn up.

Additionally, LHBL’s current margin calculation only includes the gas rate specified in the GSA. This practice is expected to continue until the GSA expires in 2025, implying that the company’s power & fuel costs is expected to remain near its historical average of 9% of total revenue until the tenure ends, but at the expense of growing receivables.