Section B:
• No provision diminution in value of investment in subsidiary
• Subsidiary has recognised impairment in value of its assets and effect of such provision for impairment given in CFS
Tata Power Ltd (31-3-2012)
From Notes to Accounts (Standalone financial statements)
The Company has a long term investment of Rs. 4,112.08 crore (including advance towards equity) (31st March, 2011 – Rs. 3,172.50 crore) and has extended loans amounting to Rs. 248.88 crore (including interest accrued) (31st March, 2011 Rs. 221.06 crore) to Coastal Gujarat Power Limited (CGPL) a wholly owned subsidiary of the Company which is implementing the 4000 MW Ultra Mega Power Project at Mundra (“Mundra UMPP”).
CGPL has agreed to not charge escalation on 55% of the cost of coal in terms of the 25 year power purchase agreement relating to the Mundra UMPP. As a result of the changes in the fuel prices, CGPL’s management has assessed the recoverability of the carrying amount of the assets under construction at Mundra as of 31st March, 2012 of Rs. 16,366.50 crore and concluded that the cash flows expected to be generated (on completion of construction and commencement of commercial operations) over the useful life of the asset of 40 years, would not be sufficient to recover the carrying amount of such assets and has therefore recorded in CGPL’s books as at 31st March, 2012, a provision for an impairment loss of Rs. 1,800.00 crore.
In estimating the future cash flows, management has, based on externally available information, made certain assumptions relating to the future fuel prices, future revenues, operating parameters and the asset’s useful life which management believes reasonably reflects the future expectation of these items. In view of the estimation uncertainties, the assumptions will be monitored Himanshu V. Kishnadwala Chartered Accountant From published accounts on a periodic basis and adjustments will be made if external conditions relating to the assumptions indicate that such adjustments are appropriate.
The company’s investments in Indonesian coal companies through its wholly owned subsidiaries, Bhira Investments Limited and Khopoli Investments Limited, were made to secure long term coal supply. The management believes that cash inflows (in the nature of profit distribution) from these investments from an economic perspective, provide protection from the risk of price volatility on coal to be used in power generation in CGPL, to the extent not covered by price escalations. In order to provide protection to CGPL and to support its cash flows, the Management has committed to a future restructuring under which the Company will transfer at least 75% of its equity interests in the Indonesian coal companies to CGPL, subject to receipt of regulatory and other necessary approval, which are being pursued and will also evaluate other alternative options.
Having regard to the overall returns expected from the Company’s investments in CGPL, including the proposed future restructuring no provision for diminution in value of long term investment in CGPL is considered necessary as at 31st March, 2012.
From Auditor’s Report
Without qualifying our opinion, we draw attention to the following matters referred to in the Notes forming part of the financial statements:
(i) xxxx
(ii) provision for investment in a subsidiary referred to in Note 32(j), which describes the key source of estimation uncertainty as at 31st March, 2012 relating to the Company’s assessment of the recoverability of carrying amounts of assets including assets under construction that could result in material adjustment to the carrying amount of the long-term investment in the subsidiary.
From Notes to Accounts (Consolidated Financial Statements) Coastal Gujarat Power Limited (CGPL) is implementing the 4000 MW Ultra Mega Power Project at Mundra (“Mundra UMPP”). During the year, CGPL has declared commercial operations for its first Unit of 800 MW and continues the construction activities for the balance 4 unit of 800 MW each at its project site at Mundra
In terms of the 25 year Power Purchase Agreement (PPA), CGPL has agreed to charge no escalation on 55% of the cost of coal. As at 31st March, 2012, CGPL has in pursuance of Accounting Standard 28 (AS 28) –
“Impairment of Assets”, assessed impairment of its Mundra UMPP, having regard to the upward revision in the fuel prices. Based on such assessment, CGPL has accounted an impairment loss of Rs. 1,800 crore in respect of its Mundra UMPP, which has been recognised as an exceptional item-impairment loss in the Statement of Profit and Loss. The recoverable amount of the relevant assets has been determined on the basis of their value in use. The discount rate used in the current period and the previous year in measuring value in use is 10.57% per annum.
In estimating the future cash flows, CGPL’s management has based on externally available information, made certain assumptions relating to the future fuel prices, future revenues, operating parameters and the assets’ useful life, which CGPL’s management believes reasonably reflects the future expectation of these items. However, if these assumptions change consequent to change in future conditions, there could be future adverse/favourable effect on the recoverable amount of the asset. The assumptions will be monitored on periodic basis by CGPL’s management and adjustments will be made, if external conditions relating to the assumptions indicate that such adjustments are appropriate.
Consequent to the impairment loss in respect of Mundra UMPP, certain financial covenants in the loan agreements in respect of loans borrowed for construction of the project have not been met as at 31st March, 2012. No notice has been served by the lenders, declaring the loans taken as immediately due and payable. Meanwhile, CGPL has approached the lenders to seek waiver from the compliance with the financial covenants to the extent that such breach is due to the changes in foreign exchange rates and increases in coal prices and CGPL’s Management expects to receive such waivers. Accordingly, loans aggregating to Rs. 11,162.12 crore are considered to be long-term borrowings (including current maturities of long term borrowings of Rs. 566.57 crore).
