Tata Power: CERC orders formation of committee on Mundra UMPP tariff review

17 April 2013

Update |Sector: Utilities

Tata Power

CMP: INR96

TP: INR 95

Neutral

CERC orders formation of committee on Mundra UMPP tariff

review, Set‐off of mining gain negative

(TPWR IN, Mkt Cap USD4.2b, CMP INR96, TP INR95, 1% downside, Neutral)

‐

CERC order for Mundra UMPP is in‐line with order on Adani Power issued

earlier. Order highlights formation of committee to work out compensatory

tariff, the report for which will be submitted by 15

May 2013. Mining profit

from proportionate coal quantity would be set‐off, which is negative (vs earlier

expectation of pure tariff review). DISCOMs can however challenge the order.

‐

While order is in right direction, we would wait for committee report to assess

actual benefit for project. We note that ~50% of Mundra UMPP’s losses could be

set‐off against mining gain, thus limiting quantum of tariff hike.

Order for Mundra UMPP, in‐line with Adani Power

‐

Central Electricity Regulatory Commission (CERC) has passed an order for

Mundra UMPP’s plea for tariff review. Current order is in‐line with earlier order

released in the matter of Adani Power, for its Mundra project, upholding that

“change in law” and “force majeure” is not tenable.

‐

Order suggests no re‐negotiation of tariff to maintain sanctity of bids of

competitive bidding. Parties to reach agreement for a compensation tariff, over

and above the tariff agreed in the PPAs.

‐

Matter to be decided by the committee having representation from vested

parties, independent financial analyst, lenders, etc. Committee to submit its

report by 15

May 2013.

‐

Committee shall take into account: (a) net profit earned by the petitioner from

coal mines in Indonesia corresponding to the quantity of the coal to be set‐off

(b) Exploring possibility of sharing revenues of sale of power beyond target

availability to the third parties and (c) Use of low GCV coal.

Await further details; set‐off of mining PAT is negative

‐

CERC order for Tata Power’s, Mundra UMPP project has established that the

profit earned from coal mining operation be now passed on to beneficiaries. We

estimate PAT contribution from proportionate coal equity could be in the range

of INR5b, while we forecast losses of ~INR11b for Mundra UMPP project

(~INR0.48/unit).

‐

While any relief in the matter would be positive, the actual gain depends on the

quantum of benefit. We note break‐even for Mundra UMPP = Share of gain

from mining + Tariff hike. Thus, too that extent, the set‐off mining PAT is partly

negative for TPWR and limits gains on entire value chain (Mining investment +

Mundra project). We await details of the committee’s observation and quantum

of benefit. Re‐iterate Neutral.

CERC order can be challenged by DISCOMs

‐

Dissent of one member commission (no tariff hike recommended) could lend

strength to DISCOMs argument and consumer bodies like Prayas and thus,

possibility of challenge to the order is not entirely ruled out. We continue to

believe that while the actual gain to a developer would be dependent on various

moving variables, the lenders in the value chain are getting increasingly

Tata power

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17 April 2013