SC ruling on tariff is credit-negative for Tata Power: Moody's

New Delhi, April 12: Following the Supreme Court's rejecting the Tata Power plea for compensatory tariff, US rating agency Moody's said on Wednesday that though the company's 'Ba3 negative' rating remains unaffected, the court verdict is a credit-negative for the power major.

"The Supreme Court's decision is credit-negative but does not impact Tata Power Company's (TPC) Ba3 rating," Moody's Investor Service said in a report.

Ba3 is a Moody's medium grade rating indicating moderate credit risk.

The Supreme Court on Tuesday rejected the plea for compensatory tariff by Tata Power and Adani Power for the additional costs they were incurring on raised prices of the coal imported from Indonesia for their power plants in Gujarat.

The apex court overturned the order issued by the Appellate Tribunal of Electricity (ATE) in April 2016 which allowed relief to Tata Power subsidiary Coastal Gujarat Power Limited (CGPL).

CGPL's 4,000 MW Mundra ultra mega power plant (UMPP) relies entirely on imported coal, which is primarily sourced from Indonesia.

The power generating companies had sought compensatory tariff after coal imported from Indonesia witnessed a steep hike following change in their laws in 2010 and 2011 by which the export price of coal was aligned with international market price. This changed prices that were prevalent for last 40 years.

The order by the ATE would have benefited CGPL by allowing compensation for higher coal prices, the extent of which was to be determined by the Central Electricity Regulatory Commission (CERC).

"Tata Power did not recognise revenue based on ATE's and CERC's earlier orders allowing for compensatory tariff, following a conservative accounting policy. Accordingly, this order should not lead to any restatement of historical financials," Moody's said.

"CGPL is currently in breach of its bank loan covenants relating to its maximum debt-to-equity ratio and minimum debt service coverage ratio, given the impairment booked on its assets and the reduced cash flows, and they have been in discussions with its lenders for the waivers," it added.

Tata Power is supplying power under a Power Purchase Agreement (PPA) to Gujarat, Rajasthan, Maharashtra, Punjab and Haryana and Adani Power under PPA is supplying power to Gujarat and Haryana from its plant in Mundra.

In the judgement, the Supreme Court has clarified that changes in the cost of fuel or the agreement becoming onerous to perform are not treated as force majeure events under the PPA.