Slow improvement of Tata Power's cash flows and liquidity expected

Its positive rating has been revised.

Standard & Poor's Ratings Services has said that it had revised its rating outlook on India-based
power utility Tata Power Co. Ltd. to stable from positive.

According to a release from Standard & Poor's Ratings Services, it also affirmed its 'B+' long-term corporate credit rating on the company and its 'B+' issue rating on its senior unsecured notes.

"We revised the outlook to reflect the likelihood that Tata Power's cash flows and liquidity will improve slower than we earlier expected," said Standard & Poor's credit analyst Mehul Sukkawala.

This is because of a delay in the regulatory and legal process for an increase in tariffs for the company's Mundra project.

Further, Tata Power's receipt of proceeds from the sale of its 30% stake in PT Arutmin, a coal mine in Indonesia, is substantially delayed.

Here's more from Standard & Poor's Ratings Services:

We believe an increase in tariffs for Tata Power's Mundra project could improve the company's financial strength and help resolve covenant noncompliance for loans related to the project.

India's Central Electricity Regulatory Commission (CERC) had in February 2014 approved a higher tariff for power from the project to compensate Tata Power for an increase in coal costs.

The CERC also allowed a fuel-cost pass-through mechanism for power supplied from the project. However, the CERC decision was challenged by some power procurers and is now before an appellate tribunal.

Even if the tribunal decision comes soon, the aggrieved party is likely to appeal the ruling before India's Supreme Court.

Ongoing financial challenges at the Bakrie Group, which bought the Arutmin stake, could further delay receipt of US$500 million in sale proceeds for Tata Power. We therefore do not factor this receipt into our base-case forecasts.

We expect Tata Power's cash flows to improve over the next two to three years, driven by the company's regulated businesses in Mumbai and Maithon, and a joint venture with Tata Steel Ltd. The recent increase in tariff for Tata Power's Delhi distribution business should also support cash collections.

However, underperformance of the Mundra project and the in-house coal business could limit the improvement. In addition, Tata Power is awaiting further regulatory or government measures to recover receivables related to its power distribution in Delhi.

"We expect Tata Power to restrict capital expenditure to regulated businesses and defer all discretionary or new project related work to keep its debt under check," said Mr. Sukkawala.

Consequently, we expect Tata Power's ratio of funds from operations (FFO) to total debt to be 10%-14% over the next two years, consistent with an "aggressive" financial risk profile.

We expect Tata Power to continue to benefit from its good market position as a large private sector utility company with diversified operations across generation, distribution, transmission, and coal mining.

The company has good operating efficiency and benefits from good electricity demand in India. The below-average profitability of the Mundra project pending resolution of the tariff issue constrains Tata Power's business risk profile, which we continue to assess as "fair."

The stable outlook reflects our expectation that cash flows from Tata Power's regulated business and the company's lower capital expenditure will offset uncertainty over the Mundra project and the coal business over the next 12 months.