TEXT-Fitch release on Malana Power Company Limited

(The following statement was released by the ratings agency)

July 23 - Fitch Ratings has today assigned India's Malana Power Company Limited (MPCL) a National Long-term issuer rating of 'A-(ind)' (A minus(ind)) with Stable Outlook. Fitch has also assigned MPCL's INR986.7m outstanding long-term bank loans a National Long-term rating of 'A-(ind)' (A minus(ind)). Simulteously, Fitch has also affirmed the 'AAA(ind)(SO)' rating on MPCL's INR250m secured non-convertible debenture programme, based on an irrevocable and unconditional guarantee from Infrastructure Leasing & Financial Services Limited ('AAA(ind)'/'F1+(ind)').

The ratings reflect low demand risk stemming from a favourable demand and supply mismatch for power across India, including the northern region, which is a core market for MPCL. The ratings also factor in MPCL's robust earnings, backed by strong off-take prices for peak load merchant power and successful operation of its Malana Power plant since it began commercial operations in 2001. In addition, the ratings take into account expected de-leveraging by MPCL, with repayment of its outstanding debt by FY13. The ratings also draw comfort from the company's debt service reserve account, which covers a minimum of six months debt service requirements.

However, the ratings are constrained by the support extended by MPCL to its 88%-owned subsidiary, AD Hydro Power Limited (AD Hydro), in the form of a corporate guarantee for its estimated debt of INR10.4bn and interest thereon. The annual cash liability on MPCL is presently limited to INR450m and expected to increase to INR800m as part of its financing of AD Hydro's 192MW project cost overrun. Although MPCL's debt coverage ratios are comfortable under various Fitch stress scenarios, after incorporating the increased liability on account of this corporate guarantee, the ratings may come under pressure should it increase its support for AD Hydro, either by funding further cost overruns or raising the annual cash liability further.

As a single-asset merchant power plant, presently operating through yearly sale agreements, MPCL remains exposed to downward pressure on power prices in the medium-to-long-term, variations in hydrology, and operational disruptions from natural disasters. Although MPCL sells power through a leading power trader, PTC India Ltd (PTCI.BO) ('F1+(ind)'), financially weak state-owned utilities remain the ultimate buyers.

In FY07, MPCL had revenues of INR1.35bn and EBITDAR of INR1.18bn. The EBITDA and net income margins have improved to 87% and 61%, respectively, in FY08 based on higher tariffs. The corresponding figures for FY07 were 81% and 33%. MPCL owns and operates an 86MW hydroelectric plant in the Kullu district of Himachal Pradesh, India.