Coal news and updates

S&P lowers Tata Power outlook on low fuel recovery costs

September 6: Standard & Poor's Ratings Services said on September 6 that it had lowered its long-term corporate credit rating on India-based power utility Tata Power Company Limited  to "B+" from "BB-". The outlook is negative.

At the same time, it has 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 its 4,000-MW 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 ultra mega power project (UMPP) exposes Tata Power to volatility in coal prices because the company can only pass through a part of the 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.

"We believe 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," Vishwanathan. 

He added: "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 totalling 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," Vishwanathan further said.

The outlook also reflects uncertainty regarding approvals for the tariff relief at Mundra.
"In our base case, we forecast an improvement in cash flows, particularly in 2015.

However, a higher-than-usual level of uncertainty is attached to our base-case expectations. We may lower the rating if Tata Power's liquidity weakens further or if the company faces difficulty in refinancing its upcoming debt maturities in a timely manner.

A downgrade could also follow a further deterioration in cash flows, such that the ratio of FFO to debt reduces to 5%-7% on a sustained basis. We believe this could occur if coal prices decline further or remain low for a sustained period, or if approvals for the tariff relief are not available beyond 2015," the S&P release said.
"We may revise the outlook to stable if Tata Power: (1) has a concrete plan to meet its upcoming debt maturities; (2) eliminates its bank loan covenant breaches; and (3) faces no material deterioration in its business," the release said.