The 4,000 MW Mundra Ultra Mega Power Project of Tata Power’s subsidiary, Coastal Gujarat Power Ltd, has primarily caused Tata Power to suffer a downgrade in its credit rating from ‘stable’ to ‘negative’.

The ratings agency, CRISIL, which termed the Mundra UMPP “unviable”, has commented that Tata Power’s profitability will be “lower-than-expected over the near term because of the lower-than-expected dividends” from the coal companies partly owned by Tata Power.

The lower dividend income would not be sufficient to offset the standalone losses at the Mundra project, CRISIL said. For the first half of the current year, Coastal Gujarat Power made a net loss of Rs 626 crore.

In a separate rating exercise, CRISIL has also downgraded Coastal Gujarat Power to ‘negative’. Tata Power is by agreement required to support Coastal Gujarat by way of additional funding for meeting any cost overruns and debt servicing until such time certain financial covenants are attained. That’s why the Mundra Project is a burden on Tata Power.

In order to support Coastal Gujarat Power, Tata Power has said it would transfer 75 per cent of its ownership in coal mines in Indonesia to the subsidiary, so that the dividend income directly flows to it. The scheme is in the works.

Tata Power won the Mundra Project in a competitive bidding process in 2006, bidding a tariff of Rs 2.26 a kWhr. The project was to get coal from Tata Power’s coal mines in Indonesia. A couple of years ago, the Indonesian Government made it mandatory to link the Indonesian coal prices to international prices of coal. The resultant increase in fuel prices made it unviable for Tata Power to sell electricity at Rs 2.26 a unit.

Tata Power has since appealed to the Central Electricity Regulatory Commission for a tariff hike. It has said that it needs at least 40 paise more even for breaking even, and a further 25 paise for a reasonable return. The various state electricity distribution companies, notably that of Gujarat, have opposed the demand for tariff hike on the grounds that Tata Power knew at the time of bidding that fuel costs could go up.

(This article was published on November 19, 2012)
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