(The following statement was released by the rating agency)
Jan 07 -
Summary analysis — Tata Power Co. Ltd. —————————————- 07-Jan-2013
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, exposure to volatility in coal prices and to competitive power generation projects, and residual completion risk at its coal-based generation projects. 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 temper these weaknesses.
In our view, Tata Power’s financial risk profile is likely to remain under pressure over the next six to nine months because Coastal Gujarat Power Ltd. (100% owned subsidiary of Tata Power) has breached a debt-to-equity ratio covenant on loans it has drawn for its project at Mundra. Tata Power is negotiating with lenders a mechanism to include cash flows from its 30% stake in Indonesian coal producers—PT Kaltim Prima Coal and PT Arutmin Indonesia—toward the calculation of financial covenants on the loans. Although disbursements from project facilities have not been curtailed at present, lenders could require early repayment of a portion of drawn loan amounts if the mechanism is not established. If this were to occur, Tata Power may have to infuse further equity from its own cash flows to support the project. Nevertheless, in our view, Tata Power is likely to receive waivers on the covenant breach.
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. In Standard & Poor’s Ratings Services’ base-case scenario, we expect Tata Power to receive EBITDA (by way of dividend from coal companies) of about Indian rupee (INR) 450 per ton from about 85 million ton of coal production at the coal companies in the fiscal year ending March 2014. Nevertheless, 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 plant to operate using blended fuel with low-calorific-value coal may reduce some of this risk.
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, ongoing work to re-route a rail corridor has reduced plant availability from the second unit at the Maithon project due to shortage of coal supply. This could temporarily weaken cash flows from the project. Nevertheless, the current plant output is sufficient to meet the company’s obligations under power purchase agreements.
We expect Tata Power’s ratio of funds from operations (FFO) to adjusted debt to be below 10% for fiscal 2013. This is primarily on account of a weaker-than-expected performance of the coal business. However, we believe the ratio could increase to about 10% over the next 18 months with the completion of the Mundra project, full restoration of the railway corridor at Maithon, and greater cash flow from the coal companies.
Tata Power benefits from high domestic electricity demand as a result of a large power deficit in India. 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) became effective in fiscal 2013, and will help Tata Power recover some past fuel costs. Moreover, from January 2012, the company has been able to fully 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. Our assessment reflects the lack of a resolution to the covenant issue for the Mundra project. 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 estimate the company’s liquidity sources at INR87 billion over the next 18 months. These include cash and cash equivalents, FFO, undrawn credit facilities, and additional debt the company may require 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 to three years.
— Uses of liquidity include capital spending of about INR87 billion in the next 18 months, 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 may not improve in line with our expectations. This is on account of weaker operating conditions for the coal business and potential negative developments on the Mundra covenant issue. 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 any of the following factors constrain an improvement in Tata Power’s ratio of FFO to adjusted debt to 10% or more on a sustained basis:
— Cash flow contribution from Tata Power’s coal investments in Indonesia are weaker than we expect. A 15%-20% drop in our expected EBITDA per ton contribution to Tata Power (by way of dividend from coal companies) for fiscal 2014 due to lower sales, lower realization, or higher production costs would characterize such a scenario.
— Cash flows from the Maithon project do not improve. This could occur if the project fails to maintain its progress on the railway corridor, which delays full operations at the project. We expect all units of the project to be fully operational by the end of 2013.
— The waiver process on the Mundra project loan covenant is delayed or the mechanism for inclusion of cash flows from the coal companies toward the Mundra project is not established, which causes acceleration of payments on a portion of the loans to the Mundra project.
We could revise the outlook to stable if: (1) Tata Power secures a waiver from its lenders; (2) construction at the Mundra project continues as planned and within budget; (3) we expect the company to face no material deterioration in its business; and (4) Tata Power maintains its financial risk profile, such that ratio of FFO to adjusted debt remains at 10%-12% on a lasting basis.