Rise in domestic coal output credit positive for power producers: Moody's

But flags challenges including uneven gas supplies, cost over-runs

Ratings agency Moody's today said that rise in domestic coal output is credit positive for the industry, but the sector still faces persistent challenges including uneven gas supplies, cost over-runs at some generating plants and limited off-take demand from financially weak distribution utilities.

In its report released today, Moody's said that some generators are also locked into power purchase agreements (PPAs) that have become unviable as they do not allow rising fuel costs to be passed through. All of these factors will continue to weigh on the sector's credit profile, it said.

Moody's Vice President and Senior Analyst Abhishek Tyagi said, "Higher domestic coal output is positive for Indian power producers, but challenges remain".

Coal India (unrated), which accounts for 80% of domestic coal output, raised its production by 7% in the financial year ending March 31 2015 (FY2015), and 9.4% more in the first five months of the current financial year. Output rose after the government initiated a process of auctions and allotments for coal mines.

"The increase, if sustained, will be a key positive for IPPs, as it will reduce their dependence on costlier imported coal and improve their financial profiles," said Tyagi.

The report says that assuming a compound annual growth rate (CAGR) of 7% in domestic output, the power generators' dependence on imports would to fall to 8% by FY20 from 25% currently, reversing the sharp rise in the sector's dependence on imports between 2011 and 2015.

However, if domestic output grows at a more moderate 4% between FY16 and FY20, and if the ramp-up in production from the allocated mines is delayed by one year, the decline in import dependence will likely stall to 18% by FY20.

Moody's also said that financial weakness of the state-owned distribution utilities has constrained their ability to enter into long-term PPAs with the generators.

This scarcity of long-term PPAs has in turn undermined the IPPs' ability to secure binding fuel supply agreements for cheap domestic coal, as generators backed by long-term PPAs are given preferential access to such supply arrangements, it added.

In this context, Moody's said that improving the financial profile will require consistent tariff revisions and reduction in distribution leakages.

In addition, the agency said that the IPPs themselves also face other headwinds which include PPAs that have become unviable due to rising fuel costs, uneven gas supplies, and average cost over-runs of 35% for many generating plants under construction.

Moody's said that the Reserve Bank of India's (RBI) decision to allow IPPs to extend their loan maturities, while helpful, will not offer a lasting solution to enhancing their credit profile.