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June 18 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed India-based NTPC Limited's (NTPC) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed NTPC's senior unsecured rating and its USD2bn medium-term note programme at 'BBB-'. The ratings continue to be constrained by the ratings of its parent, State of India (BBB-/ Stable).
Key Rating Drivers
Robust business model: NTPC's ratings benefit from its regulated business model which ensures stable operational cash flows. The company has low off-take risks due to the presence of long-term power purchase agreements (PPAs) that allow for the pass-through of fixed costs as well as fuel costs under capacity and energy charges, respectively. Its returns are regulated based on invested capital and a rate of return as per a transparent regulatory model.
NTPC's plants are eligible to receive full capacity charges if their availability factor (AF) is above 85%; in the event the AF is below this threshold, capacity charges are pro-rated according to actual availability. The company's coal-fired plants had an average AF of 87.6% in the financial year to March 2013 whereas its gas-based plants reported an average AF of 93.1%. Few coal-fired plants, especially those in the east, had AFs of less than 85% due to coal shortages, and only account for a small proportion of the total installed capacity of NTPC.
Dominant market position: NTPC is the largest power generation company in India with 25% share of total power generated in the country and 16% of the installed capacity. Of India's total installed capacity 68% is thermal of which NTPC accounts for 24%. The company represents 24% of the country's coal based capacity and 20% of its overall gas-based capacity.
Fuel shortage: Coal shortage is a risk for the power industry, including NTPC. Domestic coal production has not kept pace with growth in coal-based power plant capacity over the years. This has led to shortage of coal at various coal-based power plants. This has resulted in plant load factors (PLFs) for coal-based plants on an overall India basis to decline to 70% in FY13 (FY12: 73%). While NTPC has fared better its PLF has fallen to 83% in FY13 from 85% in FY12.
However, coal supply risk is to some extent mitigated by NTPC's coal agreements for its plants (80% of its overall capacity) commissioned before March 2009 with Coal India Ltd (CIL). It is still finalising agreement for plants commissioned post March 2009 with CIL, though it has signed MoUs for them. NTPC has six coal mining licenses, of which one is likely to start operations from 2013.
Weak counterparties: Most of NTPC's customers are distribution companies (discoms) of State Electricity Boards (SEB), with weak financial profiles and high level of losses. Despite their weak finances, NTPC has had 100% recovery of its dues for the past 10 years. The payables are backed by letters of credit (LC) equivalent to 105% of average monthly billing as well as by the tri-partite agreement between NTPC, Reserve Bank of India and state governments which run till 2016. In addition, NTPC accounts for a large share of the electricity requirements of its customers; given the importance of NTPC's supply, its customers tend to prioritise payments to the company to assure continued supply of electricity.
High capital expenditure: Over the next four years to 2017, NTPC expects to commission around eight GWs of power plant capacity in addition to its 35.9GWs of installed capacity at FYE13. All its expansions have PPAs, allocated land, environmental clearances, and fuel linkages in place. While operating cash flows are strong and stable, high capex will lead to negative free cash flow generation over this period.
Robust credit metrics & liquidity: NTPC's financial leverage as measured by net debt/ EBITDA was 2.54 x at FYE13, albeit up from below 2.0x prior to FY12. Fitch expects its credit metrics to deteriorate on high capex and resultant negative free cash generation; however, Fitch expects its net leverage to remain below 3.5x over the medium term, which is comfortable for its 'BBB' standalone rating. NTPC's liquidity position is comfortable given its high cash balance of INR168bn at FYE13.
Sovereign linkage: NTPC is rated a notch below its standalone profile of 'BBB', as its ratings are constrained by that of its 75% owner - the Indian State (BBB-/Stable). Fitch assesses that despite a reduction of sovereign ownership from 84.5% in February 2013, strategic linkages and the state's ability to control operating and financial policies of NTPC remain strong. Provided that the linkages remain intact, 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.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-An upgrade of the sovereign rating
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- A downgrade of the sovereign rating