Standard & Poor’s Ratings Services (S&P) has lowered its rating on private power producer Tata Power to B+ from BB-.
“The outlook is negative,” S&P said in a statement released from Singapore. “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 per cent over the next 12 months,” said S&P credit analyst Rajiv Vishwanathan.
The primary reasons for Tata Power’s lower cash flows on a consolidated basis are less-than-full recovery of fuel costs at a 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 project exposes Tata Power to volatility in coal prices because the company can pass on only a part of fuel costs to its customers. The Central Electricity Regulation Commission (CERC) recently issued an order for a full pass through of fuel costs at the Mundra project. A CERC committee also recommended a mechanism for payment of a compensatory tariff to recover fuel-cost related losses at the project. These are likely to improve Tata Power’s cash flows.
However, the timing and quantum of the tariff remain uncertain. S&P assesses Tata Power’s liquidity as ‘less than adequate’.
The company’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 $670 million due in April 2014, July 2014, November 2014 and April 2015.
In the base case, S&P forecast an improvement in cash flows, particularly in 2015. However, a higher-than-usual level of uncertainty is attached to its 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,” it said.