TEXT-S&P summary: Tata Power Co. Ltd.
(The following statement was released by the rating agency)
Dec 11 -
Summary analysis -- Tata Power Co. Ltd. --------------------------- 11-Dec-2012
CREDIT RATING: BB-/Negative/-- Country: India
Primary SIC: Electric Services
Mult. CUSIP6: 876566
Credit Rating History:
Local currency Foreign currency
24-Aug-2007 BB-/-- BB-/--
02-Feb-2005 BB+/-- BB+/--
Rating Rating Date
US$300 mil 8.50% nts due 08/19/2017 BB- 24-Aug-2007
The rating on Tata Power Ltd. reflects the company's "aggressive" financial risk profile, high debt leverage, exposure to counterparty risk, increasing exposure to competitive generation projects, and residual completion risk at its Mundra coal-based generation project. These weaknesses are offset by our positive outlook for electricity demand in India, Tata Power's good operating efficiency, and the strong competitive position of the company's core licensed operations.
In our view, Tata Power's financial flexibility is likely to remain under pressure over the next six-nine months because the company has breached a debt-to-equity ratio covenant on loans to the Mundra project. Any consequent curtailment of loans to the project will increase Tata Power's project expenses because the company would likely have to fund the construction of the current disbursements from project facilities have not been curtailed. If disbursements continue as scheduled, we expect Tata Power's ratio of funds from operations (FFO) to adjusted debt to remain at 10%-12% over the next 18 months. In our view, Tata Power is also likely to receive waivers on the covenant breach from lenders to the project.
The Mundra project exposes Tata Power to a risk that coal prices could increase because the company can only partly pass fuel costs on to customers. Tata Power's stakes in coal companies provide a natural hedge against higher coal prices and support its cash flows. Nevertheless, the hedge does not fully eliminate the company's exposure to coal price volatility. Tata Power's cash flows from the Mundra project and its coal companies could decline on a consolidated basis if coal prices fall. The ability of the Mundra power plant to operate using blended fuel with low-calorific-value coal may reduce some of this risk. Tata Power is negotiating with bank lenders a mechanism to include the cash flows from its coal companies in the calculation of financial covenants for loans to the Mundra project.
Tata Power's stable generation and distribution operations in the Mumbai license area, a significant reduction in project construction risk at its Mundra project, and the commissioning of the Maithon project support our assessment of the company's business risk profile as "fair." The company has completed more than 92% of the Mundra project ahead of schedule and largely within budget. However, the re-alignment of a rail corridor has reduced availability from a second unit at the company's Maithon project, which could temporarily weaken cash flows from the project. Nevertheless, the plant's current output is sufficient to meet the company's obligations under power purchase agreements. The company is likely to sign further such agreements once the rail corridor is aligned.
Tata Power benefits from high domestic electricity demand as a result of a large power deficit. Returns from the company's 100 megawatt merchant capacity have been strong. Tata Power's low cost of power relative to other private power providers, its payment security mechanism, and the domestic power deficit partly offset the impact of the weak credit profile of the company's customers (state power utilities).
Tata Power also benefits from a favorable tariff revision by the Central Electricity Regulatory Commission for the company's centrally regulated projects. A 29% increase in tariffs for Tata Power Delhi Distribution Ltd. (TPDDL)--Tata Power's regulated distribution business in Delhi--went into effect in the fiscal year ending March 31, 2013, and will help Tata Power recover some past fuel costs. Moreover, from January 2012, the company has been able fully to pass through TPDDL's fuel costs. Nevertheless, Tata Power is exposed to some regulatory risk in respect of the Mumbai license area and TPDDL.
In our view, Tata Power's liquidity is "less than adequate," as defined in our criteria. The company's sources of liquidity are sufficient to meet its needs over the next 12 months. Our liquidity assessment is based on the following factors and assumptions:
-- We expect the company's liquidity sources to amount to about Indian rupee (INR) 87 billion over the next 18 months including cash and cash equivalents, FFO, undrawn credit facilities, and additional debt as required to meet capital spending needs.
-- We expect Tata Power to have steady recurring cash flows, with FFO averaging more than INR40 billion per year over the next two-three years.
-- Uses of liquidity include about INR87 billion in the next 18 months for capital spending, debt maturities of INR22 billion, working capital needs, and dividends.
Tata Power has good banking relationships and strong standing in the credit markets.
The negative outlook reflects our view that Tata Power's cash flows and financial risk profile could weaken. However, we believe that the company is unlikely to engage in large new capital spending or debt-financed acquisitions involving significant cash outlays over the next 12-18 months.
We could lower the rating if Tata Power is unable to secure a waiver from its lenders following its covenant breach. We could also lower the rating if increased spending resulting from the Mundra project or another cause were to substantially weaken Tata Power's financial risk profile. A ratio of FFO to adjusted debt of less than 10% on a lasting basis would indicate such deterioration.
We could revise the outlook to stable if Tata Power secures a waiver from its lenders and construction at the Mundra project continues as planned and within budget. We could also revise the outlook to stable if the company faces no material business deterioration and maintains its financial risk profile, such that FFO to adjusted debt remains at 10%-12% on a lasting basis.