Negatives priced in
Mundra UMPP’s estimated project losses (at R1.1 bn in FY12, R5.9 bn in FY13 and R17 bn in FY14) are largely from the constrained PPA (power purchase agreement) structure, and not due to poor project economics. We calculate the Year 1 all inclusive generation cost from the project at R3/unit, which is competitive when compared with tariffs of R2.5-2.8/unit for several of NTPC’s new capacities (based on domestic coal linkages).
Tata Power had charged off an impairment provision of R8.2 bn in Q2FY12 on the Mundra UMPP to factor in expectations of increased coal prices, vs its earlier review by $9-10/ton. Current estimates factor prices of $125-115/ton in FY12-14, and LT (long-term) average at $83/ton. Given recent softening of international coal prices, with RB Index down from $123/ton in Mar-11 to $103/ton recently; we expect that a large part of these provisions could be possibly reversed in Q3/Q4FY12.
To provide comfort to the bankers, the company is transferring 75% of its investment in mining Holdco (KPC/Arutmin mines) to Mundra UMPP SPV (special purpose vehicle). This will entail that project funding continues at agreed DER (debt-equity ratio) of 75:25, as the bankers had earlier capped the debt funding at 63% of the project cost till