Final order on Mundra UMPP likely by Dec-end: Tata Power

In an interview to CNBC-TV18 Anil Sardana, MD, Tata Power says CERC is expected to issue a final order on tariff revision of Mundra UMPP by end of December.

Maharashtra government in November approved Tata Power's application for tariif revision in its 4,000 MW ultra mega power project (UMPP) at Mundra, which is was recommended by the Deepak Parekh panel with some riders. Currently the total dollar debt for the company stands at USD 1.2 billion. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Has the Central Electricity Regulatory Commission (CERC) told you when the final order is coming? A: Well they have not indicated a firm schedule. CERC has finished the hearings and Maharashtra Electrictiy Regulatory Commission (MERC) has just submitted their affidavit about few days back on November 26 and now they have given time for us to file an affidavit to give our rejoinder on that affidavit. After that perhaps they will take another two-three weeks. So, I am hoping that by end of December we could hope for the order. Q: We understand that Maharashtra and Haryana State Electricity Boards (SEBs) have in written asked for the right to terminate the power purchase agreement (PPA) without any compensation, is that true and if that is indeed one of the conditions they put forward to you getting that compensatory tariff, would that seriously affect your fortunes? A: I think it has been quite misunderstood. The clause that you are particularly referring to is actually a very genuine clause from their side I would suggest. What they have actually expressed is that assume that tomorrow the dollar fluctuation makes the dollar go to a very unviable number, and similarly if the coal gets to an unviable number like USD 150 or USD 200 per tonne, what they have said is that if this power becomes uncompetitive compared to other sources that they have to their disposal, then they shouldn’t be paying us the compensatory tariff, they should rather be allowed to reset back. I think that is a fair ask from their side for the simple reason that today the basic point that we have all been making is that despite compensatory tariffs this would be one of the most competitive power that they will be able to source. Now if that is the case how can we just simply expect that they will have to pay the compensatory tariff even if this becomes completely out of the whack. So it is a very fair ask from their side and to that extent I completely endorse that thought. Q: A word on the compensatory tariff amount, it has been recommended at 50 paise but at how much of a tariff hike will you be able to incur either cash profit or completely recover all of your fixed costs? A: There are two prime components of the tariff. One is the variable cost, which is the fuel part and the other is the fixed cost. As far as variable cost is concerned we have requested for a variable cost to become a pass-through because of the changes that happened globally. As far as the fixed cost is concerned, there too we have new challenges particularly because of the dollar exchange variation. If you recall, we completed the project at a very competitive fixed cost but in terms of mark to market and with dollar having fluctuated to a point where it is upwards of 62/USD, our price continues to fluctuate, our fixed cost continues to fluctuate. In other words, it is reflecting the amount that we have to pay in terms of interest as well as the principal. Our interest is hedged though of course at a cost the principal – there are no tools available today in the market, which will be able to hedge it for period beyond three-four years because the banks themselves are very wary of where rupee exchange could go. Considering this situation and the fact what we see, we also now have a challenge of about 13-15 paise in the fixed cost. Therefore, coming back to the question you asked – as far as the variable price is concerned with the compensated tariff of about 45-50 paise, which is what will come through, we should be able to make sure that there is no loss in the variable part, but we will have a challenge of making a return in the fixed cost because whatever returns we had envisaged, is getting wiped out today because of the change in the rupee exchange rate. Q: You dollar payments are back ended. Have you been able to reschedule your loan? It’s 30 percent of your total debt. Have you been able to reschedule it? A: Today, Tata Power’s dollar exposure is USD 1.2 billion and that’s the total kitty that we have and the challenge is whatever be the term for the payment of the principal; the biggest issue is that you are not able to hedge the exposure and the challenge is that still being very competitive loan; we got it at a time when it was very low and till today with all costs put together, it is still close to 10.5-11 percent as is determined in the Indian rupee terms. So, it is very competitive and therefore one doesn’t want to talk about restructuring it. One can look at eventual opportunities to harmonise some of our debt once we have compensated tariff order But as far as return of loan or any other swapping is concerned. That will make our cost of funds much more expensive. Therefore, we want to stay put in the manner that we have conceptualized today. Q: You said the compensatory tariff is really a pass through - does it mean that it is Rs 0.45 now but for a different coal price and a different dollar rupee rate this compensatory tariff could increase, is that the negotiation? A: That is not really the negotiation. If I take you back to what the bidding norms were, we had bid this in dollar terms and therefore to that extent once it is restored back to the concept that it will be passed through, then it would automatically get compensated for the dollar, it also then gets compensated for the change in law as well as the discount which has now been prevented by the change in law. So it restores back that aspect on which we have no control and therefore there is absolutely no expectation for loss there in the compensatory tariff. _PAGEBREAK_ Q: Another issue that investors have really been worried about is the continuous losses that you have seen in your Mundra power plant and there are some estimates which are doing the rounds of about Rs 1200-2600 crore per annum in terms of a cash loss that you might see. Can you just give us an indication of whether that will actually pan out and for how long do you think the pain would continue there? A: As long as the compensatory tariff doesn’t come we will continue to have that Rs 0.45-0.50 paisa per unit loss that we talked about and if you take account of that it automatically comes to that figure that you mentioned about Rs 1200-1500 crore loss today. It could have been Rs 2600 crore if he had not taken steps to blend the coal or not taken steps to get the stressed coal from Columbia or from US, which today we are able to often on get to some parcels because of the present situation and therefore we have been able to contain some of those losses. While our prayer is to compensate us from the day when we commissioned the unit, we will have to wait for the order to come in and see as to what exactly has been accepted against our prayers. Q: We understand the SEBs have put in two other conditions, one that they don't want it with retrospective effect, they want the hike if any on a prospective basis. Also they will not be penalised for not procuring power. Will that bleed you too much? A: The first part they certainly have indicated that against our prayer we have said it should be retrospective in actual, we have not said that retrospective based on normative basis. So if we have contained the loss by our effort we want to pass that advantage to them. We have also said that whatever gain we have in the coal side in Indonesia because of our investments there, we are willing to even use that to negate any increase that will happen and compensatory tariff should include whatever gains that we have had in the Indonesian side. On the second part that you have mentioned there is no such aspect in the request that the beneficiaries have made. Q: We were told that they said that they do not want to pay penalties if they didn’t procure the power but that tie-in with the right to terminate as well if the cost is beyond them then they will not procure and therefore they should not be penalised for not procuring? A: We need to understand from customers and consumers’ perspective that ultimately the cost of Mundra, is most competitive today and we have shown that and displayed that that even addition of this compensated tariff, it will be close to about Rs 3 or slightly below Rs 3. Today, these Discom- Distribution Companies are buying much more power beyond Rs 3. Therefore, assume tomorrow situation changes, the compensated tariff demands them to pay Rs 4-4.5. The assumption is that the domestic power and the other sources of power will not increase in the similar terms, which also is expected to be fictitious or a hypothetical situation. If we assume that internationally the coal prices will move to USD 150 and if you assume that rupee dollar conversion will move to very unfavourable terms then there is all likelihood that even the Indian coal prices and the other sources of power will increase.