TEXT-Fitch release on AD Hydro Power Limited

(The following statement was released by the ratings agency)

July 23 - Fitch Ratings has today assigned India's AD Hydro Power Limited (ADHPL) a National Long-term issuer rating of 'BBB(ind)' with Stable Outlook. At the same time, the agency has assigned ADHPL 'BBB(ind)' National Long-term ratings to its sanctioned INR7.82bn long-term bank loans and proposed INR2.58bn long-term debt programme.

The ratings reflect management's experience in implementing hydro-power projects on the Himalayan terrain. They also take into account the support from sponsor, Malana Power Company Limited (MPCL, 'A-'(A minus(ind)/Outlook Stable), for the construction of a 192MW merchant hydro-power project by way of equity infusion to meet part of the cost overrun; this in turn reflects management's commitment to complete the project.

The ratings are also supported by the corporate guarantee provided by MPCL with respect to ADHPL's debt obligations (INR10.4bn principal repayments and interest thereon). The guarantee, effective from the date of completion of the project, limits the annual cash outflow to INR450m, although this is likely to be increased to INR800m per annum. The ratings are also underpinned by a 'debt service reserve account' arrangement with a bank; this account will be permanently funded to pay off debt service due over the next 12 months.

Upon completion, the power project is expected to benefit from low off-take risk, in view of the large and growing power deficit across India. Strong prices for merchant power as compared to regulator-fixed tariffs and the project's eligibility for carbon credits provide earnings visibility. Low operational risks associated with run-of-the river hydro projects and comfortable debt service coverage ratios under various stress scenarios have also been factored into the ratings.

ADHPL's credit profile is restricted by the partial progress in the construction of the project's key modules which is now being addressed and the project's large cost overrun (INR7.71bn or 86% of the original estimate of INR8.96bn), due to high raw material prices, bad geological conditions and environmental issues. The agency expects construction risks, and cost-and-time-overrun risks to remain high during the implementation period specially in case of further geological surprises. As a merchant power project, it would remain exposed to variations in hydrology and volatility in tariff.

ADHPL is a single project company that is 88%-owned by MPCL. The latter is a 51:49 JV between the India-based LNJ Bhilwara Group and Norway's SN Power. The International Finance Corporation, Washington holds the remaining 12% in ADHPL. ADHPL is implementing a 192MW merchant hydro-power plant in the Kullu district in the northern India state of Himachal Pradesh. The company proposes to operate the power plant on a merchant basis and sell power to north Indian utilities/industries through power trading companies.