Analysis: Tata Power's UMPP woes

Tata Power hurts as costs at Mundra UMPP go up

Tata Power’s financial performance has been lacklustre, and a lot of it can be attributed to its Mundra ultra mega power project (UMPP) that it is setting up.

It all started with the government’s initiative of ‘Power for All by 2012’ launched in 2005. To meet the required demand, the government initiated development of UMPPs, each with at least 4000 mw of generating capacity. UMPPs were expected to generate power at a lower cost thanks to their size of operation and use of supercritical technology. This was expected to be a public-private partnership, which was to be operated on a Build-Own-Operate (BOO) model. The first UMPP was awarded to Tata Power. But that is where the good news ends.

In order to meet its requirement of generating 4,000 mw of power, the company needed to consume around 40,000 tonne of coal per day. Tata Power decided to import the coal for which it utilised Adani group’s Mundra Port facility and picked up a stake in an Indonesian mine.

In its conference call after FY12 results, the Tata Power management said that a substantial amount (nearly 60 per cent) of the UMPP cost of Rs 300 crore was on account of port charges. The company has a ‘take or pay’ agreement, which means that it has to bear the cost, irrespective of whether it is using it or not. Further, a change in pricing policy in Indonesia and a fall in the Indian rupee has made imports costlier.

Tata Power, through its special purpose vehicle, Coastal Gujarat Power (CGPL) raised Rs 14,000 crore of debt, which accounted for 75 per cent of the cost of the UMPP. The remaining was funded through equity. According to a Mint report, around 60 per cent of the debt was dollar denominated. The financing structure for the project was awarded the ‘Asia Pacific Power Deal of the Year’ award from the prestigious Project Finance Magazine. However, with no exports and the power supply agreement not taking into account the rising cost of servicing the debt on account of falling currency, this financing structure has added to the company’s trouble.

As the rupee has depreciated sharply, the project’s debt component has increased beyond the 75 per cent mark. To protect its lenders who are getting worried over the servicing capability of the project, the same Mint report says that Tata Power is transferring nearly 75 per cent of its stake in the Indonesian coal mine to the SPV, as certain financial covenants were triggered. These covenants have been triggered on account of a falling rupee and rising losses, which have resulted in Tata Power taking a hit on account of impairment charge of Rs 1,800 crore. Cash flow from the mines will be used to pay back the interest and principal of its Rs 14,000 crore debt.

The problem with the project is that too many variables are beyond the company’s control. Tata Power is unable to change the price as it has a fixed price arrangement with its purchaser. The company tried to control the price of its raw material by picking up a stake in a coal mine, but with the Indonesian government changing the pricing structure, Tata Power is forced to absorb the cost. A higher reliance on cheaper international debt, has turned out to be a costlier alternative on account of currency depreciation. Having to pay for port charges even while not utilising it fully adds to its woes.

In no way have the government or the state electricity boards buying power from it have contributed in causing Tata Power’s losses. Yet they are the only ones who can save the project by agreeing to higher tariffs. This higher tariff, if agreed upon, will naturally be passed on to the consumer, who will have to pay for the changed circumstances project, while the company turns profitable.