Mumbai: Tata Power Co., India’s third-most indebted generator, is negotiating with lenders to avoid penalties after it failed to meet conditions on $2.3 billion of loans taken to build its largest plant.

The company was in violation of loan covenants as of 31 March 2012, and won waivers from fines which lapsed on 30 June, according to Moody’s Investors Service and exchange filings. Tata Power is asking creditors to extend the exemption, S. Ramakrishnan, executive director of finance at the company, said in an interview.

The extra time may help the operator turn around India’s biggest power plant by allowing it to seek higher tariffs and find cheaper fuel, according to Sachin Mehta, an analyst with Centrum Broking Pvt. The unprofitable Mundra plant in India’s Gujarat state has weighed on earnings at Tata Power, which has reported two straight years of losses.

Lenders have nothing to gain from pulling the plug, said Mumbai-based Mehta. Losses from the plant in Mundra neutralize the earnings from other businesses. Once this big drag is lifted, Tata Power’s fundamentals will improve and its covenants will fall in line.

Tata Power’s plan to ensure cheap fuel from Indonesia, where it owns stakes in three mines, went awry after the Southeast Asian nation benchmarked exports to global prices. Tata Power is unable to pass on the costs as it had agreed to sell power at a fixed rate.

The company failed to meet debt-to-equity and debt service coverage ratios, Moody’s said.

Share performance

Tata Power’s shares, which have dropped 19% this year, rose 0.7% to Rs89.2 in Mumbai on Tuesday. Yields on Tata Power Ltd’s 10.75% rupee-denominated notes maturing August 2072 fell six basis points to 10.67% 11 July, according to Fixed Income Money Market and Derivatives Association of India prices.

India’s second-largest generator bought stakes in PT Kaltim Prima Coal and PT Arutmin Indonesia, both controlled by PT Bumi Resources, and a 26% share in PT Baramulti Suksessarana to ensure supply of the fuel.

Tata Power plans to transfer at least 75% of its stake in the Indonesian mines into the unit that runs the Mundra power plant in order to provide protection and to support its cash flows, to placate lenders, the company said in exchange filings on Feb. 11.

Cheaper coal

The company is also seeking cheaper coal assets in the US, Canada and Colombia, managing director Anil Sardana said in an interview in April.

The issue here is how long will it be before waivers are extended and whether the lenders impose onerous conditions, Ray Tay, Singapore-based associate vice president at Moody’s, which cut its outlook on Tata Power’s B1 non-investment grade rating, said in an e-mail. There will be uncertainties in the meantime.

Tata Power has Rs35,100 crore ($5.9 billion) of debt making it India’s third-most indebted generator after NTPC Ltd. and Adani Power Ltd., according to data compiled by Bloomberg.

Export-Import Bank of Korea, International Finance Corp., and Asian Development Bank, BNP Paribas SA along with other lenders are part of a group of creditors, which lent Rs14,000 crore, or three-quarters of the total cost of building the Mundra plant that generates nearly half of Tata Power’s 8,521 megawatt capacity.

H J Shim, spokeswoman for EXIM Bank of Korea declined to comment, citing on-going negotiations. IFC spokeswoman Minakshi Seth didn’t respond to an e-mail and four calls, while both ADB spokesman Rajesh Kumar Deol and BNP Paribas India’s spokeswoman Anjali Patil declined to comment.

Lowest tariff

Tata Power bid the lowest tariff of Rs2.26367 a kilowatt-hour to win the right to build the power plant in Mundra, a port town in Gujarat using imported coal in December 2006. The company paid $1.3 billion in 2007 to buy stakes in Bumi Resources’ mines in 2007.

From January 2009, Indonesia benchmarked coal exports to international prices, prompting Bumi to sell the fuel at market determined prices instead of at rates contracted with Tata Power.

Coal prices have risen 30 percent to $81.69 a ton in July from a low of $62.83 a ton in May 2009, according to data compiled by Bloomberg. In April the industry regulator allowed it to be compensated for higher coal costs. The new price will be decided by a panel, the regulator said in its order.

Erase losses

Tata Power needs Rs0.54 more per kilowatt hour for electricity for Mundra to turn profitable, Sardana told Bloomberg TV India in an interview 15 April. The unit may suffer a loss of Rs47, 500 crore over 25 years, considered the lifetime of a plant, if the current tariff was maintained, Tata Power told the electricity regulator.

The Mundra power plant lost Rs3782 crore in the two years to 31 March after writing off Rs2,650 crore as impairment expenses, according to a May analyst presentation posted on the company’s website. Tata Power reported a loss of Rs85.43 crore in the year ended 31 March after posting a Rs1,090 crore loss a year earlier.

Moody’s will monitor the progress in obtaining waivers and the impact of lenders’ conditions, said Tay. The rating assessor said in its statement that it will also focus on the willingness of Tata Sons Ltd., group’s holding company, to support the utility.

‘Draw comfort’

Tata Power’s growth will depend on how challenges around its Mundra project are overcome, Sardana had said in an 25 April interview, calling it the albatross around the neck.

The company is adding 1,600 megawatts of generation capacity to Mundra plant and has signed a preliminary agreement with the Gujarat government for the $1.25 billion expansion, Sardana had said in the April interview.

This electricity could be sold at market rates, countering losses arising from existing units which are bound by fixed tariff contracts signed with state governments.

Lenders can draw comfort from the proposed stake transfer of Indonesian mines into the unit that runs Mundra and the new capacity, said Centrum’s Mehta. Even lenders would like to wait and watch. BLOOMBERG