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.
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