Tata Power capex plan faces delay on coal shortage

Written by MG Arun | Shubhra Tandon | Mumbai | Updated: Jun 29 2012, 06:58am hrs
Indias largest private power producer Tata Power plans to add 1,000 MW to take its planned capacity to 26,000 MW, but says there could be a three-year delay since it faces uncertainties with regard to sourcing coal. Tata Power, which now produces 5,299 MW, had earlier targeted a production of 25,000 MW by 2017.

If you do not resolve the imported coal issue, you will not find new capacity coming up. Around 10,000 MW worth of capacity based on imported coal are being built or are in the pipeline, S Ramakrishnan, executive director, Tata Power, said. Tata Power, which has rolled out a 4,000 MW ultra-mega power project (UMPP) at Mundra in Gujarat to sell power at R2.26 a unit, is now hit by high prices of imported coal sourced from Indonesia.

Last week, rating agency Moodys said it was reviewing the corporate rating of Tata Power for a possible downgrade, primarily due to bank debt related to the companys Mundra project. Moodys said the rating action reflected material covenant breaches on bank debt associated with the project and questions relating to the projects long-term impact on its financial profile and absence of changes to tariff structures.

Any downgrade will make your life difficult when you raise money later, in terms of expense, said Ramakrishnan. The covenant breaches were, however, based on non-cash entries, which were provisions for impairment and the foreign exchange movement, he explained.

Tata Power had asked these provisions be excluded from ratio calculations like debt to equity. So we made a request only four weeks ago. But that request is still pending. If it is not approved, the legal position is that the financial covenants are not met, which means you are in technical default of the loan, he explained.

Shares of Tata Power were up 1.33% on the BSE on Thursday to close at R98.95.

Ramakrishnan pointed out that in the last four to five years private sector and private equity had pumped in fair amount of equity needed for power projects. That will definitely slowdown and we will be probably get back to what we were in the 1990s, when opportunities abounded, but capital was scarce. The high cost of coal will weaken the companys finances and prevent it from operating at peak capacity, Ramakrishnan said.

The firm will now use low grade coal at Mundra and request the government to refer the matter to the CERC (Central Electricity Regulatory Commission). The question is, how long will we be able to operate without financially weakening the organisation. If you are losing money, your objective will be to minimise the power you generate, Ramakrishnan said.

The cancellation of fixed price contracts and a jump in prices of imported coal have hurt the company. Tata Power owns a 30% stake in Indonesias Bumi Resources mines. Importers of Indonesian coal have paid as much as $30 more for a tonne of coal. While, prices of coal have shot up three-fold since 2005, Bloomberg reported on Wednesday that coal prices were set for their worst quarter in three years.

As many as 18 power plants in the country are faced with critical level of coal shortage, union minister of state for power, KC Venugopal said in March. India produced 435.84 million tonnes of coal in fiscal 2012, missing the target of 447 million tonnes. The power sectors demand for coal will increase by 237-281 mt by fiscal 2016, ratings agency Fitch said.

Launch of new generation projects will slow down in 2012 because of lower investor interest over fuel availability, softening of merchant power prices, higher fuel costs, higher interest rates and slow progress on reforms at the distribution level, Fitch said in a report in January. Access to capital will be restricted for weaker entities including state power utilities and greenfield projects,

The share of imported coal usage for power generation by volume doubled in the last two years period to 20%.