ICRA : downgrades long-term rating to AA-(Stable) for non-convertible debenture programme of The Tata Powe...

June 06, 2017

The Tata Power Company Limited

Instrument*	Rated Amount (in crore)	Rating Action
Non-Convertible Debenture	Rs. 6,600 crore	[ICRA]AA- (Stable); downgraded from [ICRA]AA (Negative)
Short Term Debt / CP Programme	Rs. 3,000 crore	[ICRA]A1+ reaffirmed
Term Loans	Rs. 1,340 crore	[ICRA]AA- (Stable) downgraded and withdrawn

*Instrument Details are provided in Annexure-1

Rating Action

ICRA has downgraded the long-term rating from [ICRA]AA (pronounced ICRA double A) to [ICRA]AA- (pronounced ICRA double A minus) outstanding on the Rs. 6,600 crore1non-convertible debenture programmes of The Tata Power Company Limited (Tata Power)2. The outlook on the long- term rating has been revised from Negative to Stable. ICRA has also reaffirmed the short-term rating of [ICRA]A1+ (pronounced ICRA A one plus) outstanding on the Rs. 3,000 crore commercial paper/short term debt programme of Tata Power. ICRA has also downgraded the long-term rating to [ICRA]AA- (Stable) outstanding on the Rs. 1,340 crore term loans of Tata Power, and withdrawn the rating as there is no amount outstanding against the same.

Rationale

The revision in the long-term rating takes into account the disallowance of any relief to Mundra UMPP under "Force Majeure" or "Change in Law" clauses as per the judgement of the Honourable Supreme Court in April 2017. The absence of any compensatory tariff for Mundra UMPP places significant burden on Tata Power to continue supporting the project's financial obligations since Tata Power has provided Debt Service Reserve Guarantee for the term debt of Mundra UMPP. The project remains loss-making owing to the under-recovery in fuel costs, though the same varies depending on the international coal prices. ICRA notes that the financial support required by Mundra UMPP from Tata Power remains sizeable at the current coal price levels, which would be partly met by the cash flows available to Tata Power from its 30% stake in the Indonesian mining assets. Mundra UMPP also remains exposed to the risk of shortfall in recovery of fixed costs given the large portion of foreign currency debt which has been impacted by the sharp depreciation of Indian Rupee from bid assumption levels; the company, however, currently hedges its forex obligations for a five-year period to mitigate any further forex risks.

The ratings are supported by the favourable financial profile of Tata Power on a standalone basis, which is aided by the stable cash flows generated from the company's operations in the Mumbai License Area arising from the cost-plus rate of return model and superior operational efficiency. The ratings also factor in the strong financial flexibility arising from the company's association with the Tata Group. ICRA further considers the comfortable liquidity profile of the company, characterised by largely unutilised working capital fund-based limits and its ability to raise adequate funds in a timely manner through equity and debt instruments as seen in the past. However, the company's standalone financial profile would witness deterioration to some extent owing to the continuing support to Mundra UMPP.

1 100 lakh = 1 crore = 10 million

2 For complete rating scale and definitions, please refer ICRA's website (www.icra.in) or other ICRA Rating Publications

The ratings are constrained by the sizeable financial support extended by Tata Power to Mundra UMPP beyond its equity commitment and the additional cash outflow of about Rs. 800 crore towards the end of FY2017 to meet its share of the Tata Group's liabilities to purchase the shares of Tata Teleservices Limited (TTL), post exercise of the put option by NTT Docomo. The ratings also factor in the delays in the receipt of proceeds pertaining to the sale of stake in one of the Indonesian mining companies - PT Arutmin - and the downward revision in its valuation in November 2016. The refinancing requirements of Tata Power remain high over the medium term, given the sizeable debt obligations on standalone basis and of its Coal SPVs (entirely backed by a corporate guarantee from Tata Power), although ICRA takes comfort from the past track record of the company in meeting its refinancing needs.

ICRA notes the increase in the borrowings of Tata Power following the acquisition of Welspun Renewable Energy Private Limited (WREPL) in FY2017, which was largely debt funded. Tata Power had issued NCDs to the tune of Rs. 3,500 crore in August 2016 to meet its financing requirements for the acquisition with a plan to refinance the same with equity funds / accruals within the next 18-month period. Thus, the refinancing of the NCDs within the previously envisaged timelines would remain important from a credit perspective.

Key rating drivers Credit Strengths

• Stable cash flows from license business, characterised by stable demand growth and favourable cost- plus rate of return model

• Healthy scale of operations with regular capacity expansions

  • Acquisition of WREPL in September 2016 makes Tata Power one of the leading domestic companies in the renewable energy space

• Limited fuel supply risks given the in-place Fuel Supply Agreements (FSA) with subsidiaries of Coal India Limited and significant investments made in Indonesian mining assets

• Favourable financial profile on a standalone basis, characterised by comfortable capital structure and liquidity profile

  • Nonetheless, continued support to Mundra UMPP has deteriorated the company's return indicators

• Strong financial flexibility arising from being a part of the Tata Group

  Credit Weaknesses

• With the disallowance of any compensatory tariff by the Honourable Supreme Court,

  Tata Power would have to continue supporting the loss-making operations of Mundra UMPP

  • Tata Power has provided a Debt Service Reserve Guarantee for the loan facility of Mundra UMPP

  • Tata Power would have to explore other measures to reduce the under-recovery in the operations of Mundra UMPP

• Exposure of Mundra UMPP to risk of shortfall in recovery of fixed costs, given the large portion of foreign currency debt, which has been impacted by the sharp depreciation of the Indian Rupee from bid assumption levels

  • However, the company has availed hedge contracts to protect itself against currency fluctuation risk on a rolling 5-year period

• Profitability from coal business impacted since FY2013 owing to sharp reduction in international coal prices, although a spike in Q3 FY2017 has led to increase in profits

  • Proceeds from stake sale in one of the Indonesian mines, PT Arutmin, yet to be received with the valuation revised downwards in November 2016

• Large refinancing requirements, given sizeable debt repayments falling due for Tata Power (including the debt raised for the acquisition of WREPL) and Coal SPVs (guaranteed by Tata Power) over the near to medium term

Description of key rating drivers:

The standalone business of Tata Power largely constitutes its operations in the Mumbai License Area where the cash flows are stable owing to the cost-plus nature of the business model that allows the company to avail fixed Return on Equity (RoE) subject to keeping its costs within the allowed levels. The multi-year tariff order for the period from FY2017 to FY2019 as directed by the Maharashtra Electricity Regulatory Commission (MERC) is in place for the generation, distribution and transmission businesses of Tata Power. In addition to the regulated returns, the company also earns efficiency gains for operating the stations at better than normative operating parameters and PLF-linked incentives for generation above normative levels.

On a consolidated basis, the company's scale of operations significantly increased with the successful commissioning of its two large projects - the 4,000 MW Mundra UMPP (COD3of March 2013) and the 1,050 MW Maithon Project (COD of July 2012). As the tariff for Mundra UMPP is 'competitively bid' in nature, the risk profile for the project is higher than that of the operations in Tata Power's License Area. The project has been loss-making since commissioning owning to the under-recovery in fuel costs. While Tata Power had sought relief for the project in the form of compensatory tariff, the Honourable Supreme Court, in its judgement issued in April 2017, disallowed any relief to the project under "Force Majeure" and "Change in Law" clauses. Tata Power would now be exploring various options so as to reduce the under-recovery in Mundra UMPP, including higher operational efficiencies, sourcing of lower cost coal, blending of lower CV coal with higher CV coal, etc. Tata Power, however, is able to partly meet the financing support to Mundra UMPP through the cash flows available from the Indonesian coal operating companies (wherein Tata Power holds 30% equity stake through offshore SPVs). Owing to the increase in coal prices during H2 FY2017, the dividend inflows to Tata Power also improved in the year but still remain lower than the quantum of dividends seen four to five years back.

On a standalone basis, Tata Power's financial profile remains robust supported by the cost-plus-based PPA structures. In Q4 FY2017, the company reported an exceptional loss of Rs. 651 crore which was the difference between the fair value of equity shares of TTL and the contractual obligation to NTT Docomo from whom Tata Power had to buyback the shares. The overall net profits thus appear low for FY2017, though the cash accruals (excluding the exceptional loss) from the overall business continue to remain healthy. The return indicators on standalone basis have, however, been impacted by the increasing financial support to Mundra UMPP.

The borrowings of Tata Power increased in FY2017 following the acquisition of WREPL for which the company raised Rs. 3,500 crore through issue of NCDs. The gearing has thus increased to 1.1 times4as on March 31, 2017 compared to 0.7 time as on March 31, 2016. The capital structure on a consolidated basis, however, remains adverse (gearing of 3.4 times as on March 31, 2017) owing to the large-scale power projects undertaken, the debt-funded funded acquisition of WREPL and the impact of past losses on the net worth of the company, including the provisions made for impairment losses. Tata Power has provided corporate guarantee on the loans raised by its Coal SPVs (principal amount of US$830 million and the interest payments) and sponsor support for debt servicing of term loans of Mundra UMPP, apart from guarantees given for loans raised by other subsidiaries / group entities (of about Rs. 2,500 crore as on March 31, 2016). The liquidity profile of Tata Power continues to remain robust supported by the largely unutilised working capital fund based facilities and healthy cash balances and liquid investments. The company's refinancing requirements in the near term remain high, though ICRA takes comfort from the company's past track record of successfully refinancing its loans in a timely manner.

3 COD: Commercial Operation Date

4 50% equity credit has been assigned to perpetual debentures of Rs. 1,500 crore raised by Tata Power in June 2011

Analytical approach: For arriving at the ratings, ICRA has taken into account the business risk profile of Tata Power and the financial risk drivers. Links to applicable Criteria

Corporate Credit Ratings - A Note on Methodology

Independent Power Producers (IPPs) and Power Generation ProjectsPower Distribution Utilities

About the Company:

The Tata Power Company Limited (Tata Power), a Tata Group company, is involved in the generation, distribution and transmission of power. It has a license for bulk supply of electricity in the city of Mumbai. Tata Power Group currently has a total generation capacity of 10,613 MW on its own books as well as its subsidiaries. Of the same, 2,027 MW capacity is utilised to meet the power demands of the License Area in Mumbai. The company supplies power to Bombay Electric Supply & Transport Undertaking (BEST). Besides, it also supplies to the Railways and other industrial and High-Tension (HT) consumers in Mumbai, apart from direct sales to retail consumers in the License Area.

Tata Power operates the 4,000 MW capacity as part of its Ultra Mega Power Project (UMPP) at Mundra (project commissioned in March 2013), and the 1,050 MW capacity in Maithon (project commissioned in July 2012) through Special Purpose Vehicles (SPVs). The company also acquired 30% stake in coal mining companies (KPC and Arutmin, based in Indonesia) in March 2007, and a 26% stake in PT Baramulti Suksessarana Tbk (BSSR), Indonesia, in November 2012, through offshore SPVs ("Coal SPVs"). In January 2014, the company announced it had signed an agreement for sale of its stake in PT Arutmin Indonesia. Tata Power has been enhancing its clean energy portfolio (comprising of hydro, waste gas, solar and wind), which currently stands at 3,141 MW, following the acquisition of Welspun Renewables Energy Private Limited (WREPL) in September 2016. Tata Power Group is also involved in power distribution in Mumbai and Delhi. It has recently entered into a distribution franchisee agreement for electricity distribution in Ajmer. Furthermore, the company has a presence in power transmission in Mumbai with over 1,110 Ckm (circuit km) of transmission lines. It is also involved in power transmission in other regions through a subsidiary, Powerlinks Transmission Limited, which commenced operations from September 2006.

Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable