RPT-Fitch Affirms India's NTPC at 'BBB-', Outlook Stable

Wed Jun 18, 2014 4:05am EDT

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June 18 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed NTPC Limited's (NTPC) Long-Term Issuer Default Rating at 'BBB-'. The Outlook is Stable. At the same time, the agency has affirmed NTPC's senior unsecured rating of 'BBB-' and the 'BBB-' ratings on its USD2bn medium term note programme.

KEY RATING DRIVERS

Constrained by Sovereign: NTPC is rated a notch below its standalone profile of 'BBB', as its ratings are constrained by that of its 75% shareholder - the Indian State (BBB-/Stable). Fitch assesses that the linkages between NTPC and the sovereign are moderate to high, with strategic linkages being especially strong. Based on the agency's parent and subsidiary linkage criteria, Fitch will provide a one-notch rating uplift on the standalone credit profile of NTPC if the company's standalone ratings were to fall below that of the sovereign, provided that the linkages remain intact.

Dominant Market Position: NTPC is the largest power generation company in India, accounting for a fourth of total power generated in the country. Of India's total installed power generation capacity of 255 gigawatts (GW), around two thirds is thermal. NTPC accounts for 23% of India's thermal power generation capacity.

Robust Business Model: NTPC's ratings benefit from stable operational cash flows due to the favourable regulatory framework. The company has long-term power purchase agreements (PPAs) for all its plants that allow for the pass-through of fixed costs as well as fuel costs. Its returns are regulated based on invested capital and a rate of return as per a transparent regulatory model. There are no off-take risks as the fixed costs are payable if the plant has achieved the regulatory benchmark availability. There is regulatory certainty until March 2019, the latest five year regulatory tariff period.

Fitch anticipates that the changes in the new tariff block compared to the previous structure are likely to affect NTPC's profitability by 8-11% compared to Fitch's earlier estimates. The new tariff block has maintained the return on equity at 15.5%; however, the lower tax grossing rate and the linkage of incentives to plant load factor (PLF) will act as negatives. These will be partly offset by the benchmark availability rate for fixed costs pass through reducing to 83% from the earlier 85% for the first three years; and provision for allowing recovery of water charges and capital spares.

In FY14, NTPC's coal-based power plants had an average PLF of 81.5% (FY13: 83.1%), with 10 of its 17 coal-based plants having PLFs of less than 85%. None of NTPC's seven gas-based plants have PLFs over 85%. The plant availability rates were much higher at 91.8% (87.6%) for the coal based plants and 95.2% (93.1%) for the gas based plants.

Fuel Shortage: There is a fuel shortage for the power sector - for both coal as well as gas. The fuel shortage has impacted the PLFs for all thermal power plants in India, although NTPC fares better than the national thermal average PLF at 65.6% (FY13: 70%). NTPC has tied up its coal supplies through 20 year contracts with Coal India Ltd for around 78% of its requirements of around 160 million tonnes per annum (mtpa). NTPC has also been allotted ten coal mines, and expects to have a production of around 33mtpa from its own mines from FY17. The PLFs of gas based plants have fallen sharply too to 36% (56%) due to declining domestic gas production.

Weak Counterparties: Most of NTPC's customers are state utilities with weak financial profiles. Despite their weak finances, NTPC has had 100% recovery of its dues for the past 11 years. The payables are backed by letters of credit (LC) equivalent to 105% of average monthly paymentsand the tri-partite agreement between NTPC, Reserve Bank of India and state governments which runs until 2016. The timely payments are also due to NTPC's dominant position, wherein it would account for a fairly high share of the electricity bought by the state utility.

High Capital Expenditure: NTPC will have capex of over INR200bn per annum over the next three to four years. The company embarks on new projects only once the PPAs, allocated land, environmental clearances, and fuel linkages are in place. The high capex will lead to negative free cash flow generation over this period. The company has considerable experience in setting up power plants with its current capacity of around 37GW at FYE14.

NTPC plans to bid for two ultra-mega power plants - with 4GW capacity each - which would each entail a capex of INR200-240bn. The company has also expressed an interest in acquiring distressed power plants which may be still under construction. Fitch has not factored either of these events into its ratings, and will analyse the impact if and when they materialise.

Standalone Rating Headroom to Reduce: The high capex has led to an increase in NTPC's financial leverage (net debt/ EBITDA) to 2.97x at FYE14, from 2.54x at FYE13. Fitch expects the leverage to increase to 3.5x over the next three years due to the high capex and resultant negative free cash generation; and also the lower profitability due to the tariff mechanism changes. The rating headroom for the standalone BBB rating is likely to decrease. NTPC's liquidity position is comfortable with a cash balance of INR153bn at FYE14.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include

-An upgrade in India's rating to 'BBB'.

Negative: Future developments that may, individually or collectively, lead to negative rating action include

-A downgrade of India's ratings

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