S&P lowers Tata Power rating to 'B+' on weak cash flows, outlook negative

Standard & Poor's Ratings Services said today that it had lowered its long-term corporate credit rating on India-based power utility Tata Power Co. Ltd. to 'B+' from 'BB-'. The outlook is negative.

At the same time, it lowered the issue rating on the company's outstanding senior unsecured notes due 2017 to 'B+' from 'BB-'. "We lowered the rating on Tata Power because we believe the company's cash flows are likely to remain weak with a ratio of funds from operations (FFO) to adjusted debt at less than 10% over the next 12 months," said Standard & Poor's credit analyst Rajiv Vishwanathan.

The primary drivers for Tata Power's lower cash flows on a consolidated basis are less-than-full recovery of fuel costs at a 4,000 megawatt coal-fired project at Mundra and lower returns from investments in Indonesian coal companies because of substantially reduced thermal coal prices.

The fully operational Mundra project exposes Tata Power to volatility in coal prices because the company can only pass through a part of fuel costs to its customers. The project's ability to blend fuel with some low calorific value coal tempers the fuel-price risk.

India's Central Electricity Regulation Commission (CERC) recently issued an order for a full pass through of fuel costs at the Mundra project. A committee set up by CERC also recommended a mechanism for payment of a compensatory tariff to recover fuel-cost related losses at the project. "These measures are likely to improve Tata Power's cash flows. However, the timing and quantum of the tariff remain uncertain. We expect Tata Power's ratio of FFO to debt to be about 7.5% in fiscal 2014 and rise to 10%-14% in fiscal 2015 if the compensatory tariff becomes effective in 2015."

A S&P releaser said lenders to the Mundra project are likely to support the project despite the expiry of a waiver on a bank loan covenant breach in June 2013.

"We assess Tata Power's liquidity as "less than adequate," as our criteria define the term. Tata Power's weak consolidated cash flows are likely to weaken its ability to pay maturing debt over the next 18 months." Tata Power has large bullet debt maturities totaling about US$670 million due in April 2014, July 2014, November 2014, and April 2015. We believe the company might undertake measures to meet its funding requirements.

"The negative outlook reflects the uncertainty regarding the company's plan to refinance its debt maturities over the next 12-18 months," said Mr. Vishwanathan. "The outlook also reflects uncertainty regarding approvals for the tariff relief at Mundra."

It said the outlook may be revised to stable if Tata Power has a concrete plan to meet its upcoming debt maturities; eliminates its bank loan covenant breaches; and faces no material deterioration in its business.