The rating is constrained by construction risk for the green field project, given the estimated 12 months delays in the project and the consequent postponement of commercial operations by around a year till September 2013. The rating also reflects residual completion risks including the ongoing land acquisition process and clearances pending for the captive coal mines, namely Utkal B2 and Mandakini Coal Co Ltd (MCCL), allocated to the sponsor group by the government for its entire coal requirements. MCCL is jointly allocated to the sponsor group with Jindal Photo Ltd and Tata Power Ltd, where the sponsor group will receive a one-third share.
Although the sponsor group operates a 230MW thermal power plant, its lack of a track record in construction and operation of a power project of the current size is a weakness along with the absence of a single engineering, procurement and construction contract. However, the fact that the bulk of construction cost is covered by a major portion of fixed price-fixed time contract for the boiler-turbine-generator plant with an experienced supplier (BHEL, ‘Fitch AAA(ind)'/Stable) mitigates the construction risk. Also, the sponsor’s undertaking to cover cost overruns and appointment of an experienced owner’s advisor (DCPL, Kolkata) provide some comfort to the ratings.
Financial risks include the variable interest rate on domestic loans and unhedged exposure to currency and interest rate risks on the ECB. The sponsor’s intention to increase its ECB exposure may increase currency-related risks, given the current steep weakening of the Indian rupee. A debt service reserve equivalent of six month’s debt service is a credit positive; however, its ramp-up from operational cash-flows is a concern.
The rating primarily benefits from the reasonable mitigation of volumetric (around 88%) and price risks through MPCL’s off-take arrangements in respect of most of its generation. Additionally, the captive coal mines not only keep the landed cost of fuel at lower levels than its peers with fuel linkages from the government, but also insulate the project from the sector-wide coal shortage. Also, the mine-mouthed project enables the company to achieve comfortable coverage metrics consistent with the current rating level; even with a lower tariff assumption than its peers.
Fitch notes that the delay has already shrunk the principal moratorium from a generous 15 months to around 3 months, thus compressing the cash flow available for debt service. As a result, MPCL would require the sponsor to support the shortfall for the first principal payment in March 2014. Fitch notes that clearances to coal mines would take around three months to a year. The agency expects that the delay may not have resulted in a significant cost overrun given the corresponding postponement in the debt draw down schedule.
Negative rating action may result from significant cost overruns resulting from further delays in the completion of land acquisition formalities for both the captive coal mines as well as in achieving the revised commercial operations date.