The negative rating follows the synchronisation of the fourth 800-MW unit of Tata Power's ultra mega power project (UMPP) in Mundra.
This is the final step before commissioning a power generation unit, which will increase its losses and is credit negative, Moodys analysts said in the credit outlook.
Tata Power has filed a petition with the Central Electricity Regulatory Commission (CERC) seeking a higher tariff at its Mundra plant as it looks to pass on increased fuel costs to its customers.
Coastal Gujarat Power (CGPL), the wholly owned unit of Tata Power which runs the plant, had also terminated its power purchase agreements (PPAs) with three distribution companies in Rajasthan earlier this month, citing non-payment of dues.
The distributors subsequently settled all their outstanding payments. By severing the PPAs, 10% of CGPLs capacity will be available for sale at higher prices although the added revenue will not be sufficient to offset the pressure on profitability from commissioning the power project.
CGPLs losses will mount as additional units at the UMPP are commissioned because the company can only partially pass through this coal-fired plants fuel costs to customers, given the terms of the PPAs, the rating agency said.
Tata Powers total power generation capacity will increase to 7,699 MW after the latest capacity addition at Mundra, reinforcing its dominant market position as the largest private sector power utility in India.