Indian Power Sphere: Moodys

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July 22, 2013

Moody's confirms Baa2 corporate family & Baa3 issuer ratings for CR Power...

Moody's Investors Service has confirmed the Baa2 corporate family rating, the Baa3 issuer rating, as well as the debt ratings of China Resources Power Holdings Company Limited (CR Power). It also confirmed the Ba2 rating of the perpetual subordinated capital securities issued by China Resources Power East Foundation Co Ltd, which are guaranteed by CR Power.

Moody's has also removed these CR Power ratings from watchlist for possible upgrade and changed their rating outlook to stable.

These rating actions are the result of the cancellation of the planned merger between CR Gas and CR Power owing to a lack of sufficient support during a shareholder vote that took place on 22 July 2013.

RATINGS RATIONALE

Moody's placed the ratings of CR Power on review for upgrade on 13 May 2013 after announcement of the proposed merger because, if successful, it would lead to higher expected support for CR Power from its parent company and synergies in utilities operations combining power generation and gas distribution.

"As the merger will not proceed, we have changed the ratings outlook to stable," says Ivan Chung, a Moody's Vice President and Senior Credit Officer.

The stable outlook reflects Moody's expectation that CR Power will maintain its financial discipline as it continues to expand, as well as its strong access to bank funding to support growth.

Pressure for a ratings upgrade will be limited in the near team, given the lack of automatic cost-pass through in coal-fired generation. Upgrade rating pressure could emerge over time if there is improvement in regulated environment for coal-fired generation or if CR Power: (1) meets its business expansion plan; (2) stabilizes its fuel costs by securing substantial ownership in coal supply; (3) is able to improve its financial profile such that FFO/interest exceeds 4x-5x, Debt/Capitalization falls below 40%-50%, and RCF/Debt exceeds 15%-20% on a sustainable basis.

The rating could be downgraded if CR Power: (1) fails to meet its business plan and generate sufficient returns on its new capital expenditures and investments; (2) takes on aggressive debt-funded expansion projects or acquisitions; (3) suffers a decline in profitability, such that its EBITDA margin falls below 20%; or (4) suffers a material impact operationally due to environmental concerns or new regulatory measures.

Such deterioration in CR Power's fundamentals is expected to be accompanied by weakening credit metrics - FFO/interest below 2.5x, Debt/Capitalization above 60%-65%, and RCF/Debt below 10%.

Furthermore, a material deterioration in the credit profile of the parent or evidence of weakness in its support for CR Power will pressure the rating.

The principal methodology used in rating CR Gas and CR Power was "Regulated Electric and Gas Utilities," published in August 2009. Please refer to the Credit Policy page on www.moodys.com for a copy of this methodology.

CR Power is an independent power producer which invests in, develops, owns and operates power plants in China. It began constructing its first power plant in 1994 and was listed on the Hong Kong Exchange in November 2003. Its 63.51% shareholder, China Resources (Holdings) Co Ltd (unrated), is a major Chinese conglomerate, ultimately owned by China's State Council. As of 31 December 2012, CR Power had 64 power plants in commercial operation, with a total attributable installed capacity of 25,271 megawatts. About 92.2% of its attributed installed capacity is coal fired. The remainder is powered by wind, water and gas.

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Additional Reading...

http://www.indiainfoline.com/Markets/News/Moodys-confirms-CR-Powers-Baa2Baa3-ratings/5736976245

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October 7, 2012

Tata Power rating lowered to B1 by Moody’s…

Credit quality of Tata Power Company (“TPC”), on of the largest private sector power companies of India, has been downgraded by Moody’s (global credit rating agency) Investors Service from Ba3 to B1 on account of on-going issues related coal availability and pricing, bank waivers and tariff renegotiations for its Mundra Ultra Mega Power Project (UMPP). Further, TPC’s unsecured bond rating has been downgraded from B1 to B2 and foreign currency rating of its senior unsecured MTN program has been downgraded from (P)B1 to (P)B2. The outlook for the ratings is stable.

TPC is the largest private-sector power utility in India with an installed generation capacity of 6,099 MW as of September 2012. The company's business operations include generation (thermal, hydro, solar and wind), transmission and distribution.

Headquartered in Mumbai, TPC has a strong presence in the area, meeting about 80% of its power requirements. Thermal capacity accounts for 86% of its capacity, with coal being the primary fuel source. Hydro power and wind form the bulk of the remaining generation capacity with a small amount of solar power capacity.

Primary reasons of downgrade seems to be…

Possible adverse impact of weak coal prices on its Indonesian coal mines, as well as the continuing uncertainty related to unresolved bank waivers and the tariff renegotiations for its Mundra Ultra Mega Power Project.
Current weakness prevailing in coal prices will eliminate the benefit the TPC was having earlier with respect to investment in coal mines which have given likely hedge against fuel costs.
Due to this the margins on coal mines will also be reduced.
As the Mundra UMPP’s coal requirement is higher than the output of TPC’s mines, the lower coal prices for UMPP will not be adequate to offset the lower cashflow of mines. This will pose an added credit challenge to TPC.
CGPL's (SPV of TPC executing Mundra UMPP) unresolved bank waivers may be viewed as a weakness. However, given the nature of the banking consortium and TPC's financial support for the project, a default is very unlikely.
Tariffs for CGPL's Power Purchase Agreements (PPAs) combine both fixed and variable elements, including fuel costs. The company currently is able to pass through only 45% of the fuel costs to its customers.
In addition, the CGPL unit relies entirely on coal imported from Indonesia. Its profitability has been affected by the Indonesian government's directive that coal be sold at market rates, thereby exposing it to considerably higher costs than expected at the inception of the Mundra project. TPC's bid for the Mundra unit was based on the expectation that coal prices would be well below the current market rates.
Although TPC has brought its case to the regulator to start renegotiating its PPAs to address fuel-cost risks, progress will take time. The lack of precedents makes it difficult to assess the likely outcome and timeline.

TPC's credit metrics have materially weakened in FY03/2012 and Moody's believes that the company will breach its downgrade triggers -- FFO interest coverage below 1.8x, adjusted debt/book capitalization above 65%, and RCF/debt below 7% -- on a sustained basis.

These key measures are no longer consistent with TPC's Ba-rated peers.

For TPC, the indicated rating from the Regulated Electric and Gas Utilities rating methodology is now Ba3. The final rating is one notch below the indicated rating, to reflect the company's greater reliance on the coal mines to generate cash flow and the current volatility in coal prices, which are unique factors not captured by the rating methodology.

The outlook is stable based on Moody's expectation that the waiver will be obtained in the next few months on terms that will not be severely detrimental to the Mundra project or TPC overall.

Upward rating pressure is limited, as the PPA renegotiation will take time. However, the rating could be upgraded if margins at the coal mines improve or the PPA is renegotiated, such that FFO interest coverage is above 2x, adjusted debt/book capitalization below 65%, and RCF/Debt above 8% on a sustained basis.
On the other hand, downward rating pressure would emerge if: 1) CGPL is not able to obtain a waiver within a reasonable timeframe and without significant additional costs or onerous new terms; 2) the company is not able to expand capacity for the Mundra UMPP and other projects within the stated timeframe and budgeted costs; or 3) FFO interest coverage is below 1.6x, adjusted debt/book capitalization above 70%, and RCF/Debt below 6.5% on a sustained basis.

More Literature on this…