Mobil demands collateral from CUC

The Commonwealth Utilities Corp. board of directors adopted a resolution yesterday authorizing management to seek a letter of credit amounting up to $10 million to meet a demand by Mobil Oil Marianas.

Mobil, the sole company that responded to CUC’s request for proposals for fuel supply, had required CUC to provide a security for payment as a contract condition.

The oil company set the condition in the wake of CUC’s failure to make prompt payments during the past several months.

In response, the CUC board allowed management during an emergency meeting yesterday to secure a letter of credit or other forms of security, in an amount not more than $10 million, to be used as security for CUC’s fuel supply contract with Mobil.

CUC also gave consent to management to pledge CUC assets, valued at $10 million or less, as collateral for the letter of credit.

Further, CUC chair Francisco Q. Guerrero was authorized to execute on behalf of the board any documents requiring board approval in connection with obtaining a letter of credit or with the pledge of assets.

CUC management is expected to secure the letter of credit before the board members meet Friday next week.

CUC’s existing two-year contract with Mobil will expire tomorrow, April 30.

According to CUC vice chair Herman P. Sablan, the utility firm is looking at extending the current contract until negotiations are finalized with Mobil.

CUC comptroller Sohale Samari reported earlier that the utility firm would face an average 11-percent increase in fuel expenses should it agree to Mobil’s offer.

Samari said the price quotations offered by Mobil ranged from a variable price that starts with an 8-percent increase over the current contract price, to a fixed price with a 15-percent increase.

Production fuel is CUC’s biggest expenditure. For the duration of its current fuel supply contract, CUC paid Mobil a total of $73 million, of which $39.7 million was disbursed in fiscal year 2004.

In FY 2006, the utility expects to spend $51.56 million of its $83.29-million budget on fuel.

This represents an increase of $16.51 million or 46.8 percent to CUC’s fuel and lube budget, as compared with FY 2005, and an increase of $20.70 million or 66.6 percent as compared with FY 2004 budget.