Power_Fitch_160113.pdf

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www.indiaratings.co.in 16 January 2013

Electric-Corporate

2013 Outlook: Indian PowerImplementation and Continuance of Reforms Hold the Key

Outlook Report

Stable Outlook For 2013: India Ratings has a Stable Outlook on its rated power sector entities

for 2013, despite the key sector risks of fuel shortage and slow reforms at the state power utility

(SPU) level. The agency expects that its rated entities will manage the issues due to a

favourable tariff mechanism, their comfortable liquidity and support from the central and state

governments.

Fuel Risk Remain High: India Ratings believes that the risk of domestic coal or gas availability

will remain high for projects commissioned post FY09. Though, Coal India Limited (CIL) has

signed 35 modified Fuel Supply Agreements(FSAs) out of 114 India Ratings believes thesupply under the FSAs will be low. CIL will have to raise its domestic coal supply to power

sector to 436mMT by FY15 from 312mMT in FY12, a CAGR of 12% which might be difficult.

The agency sees limited possibility of the use of imported coal due to boiler design and

economic viability. This would result in either delays in capacity addition or lower plant load

factors (PLFs). India Ratings expects gas-based plants to run at a sub-optimal capacity due to

the continuous decline in domestic gas availability and unfavourable LNG economics.

SPU Restructuring a Positive: The debt restructuring package for distribution companies

(discoms) is a positive as it aligns the interest of state governments with discoms by shifting

50% of discoms short-term loan to state governments. The implementation of the package,

commitment to performance-linked measures and acceptance by the banking system of therestructured assets remain the key challenges. However, if operational improvements are not

undertaken on an on-going basis, India Ratings expects the problems to resurface later.

Continuance of Tariff Hikes a Concern: Most state regulators have allowed tariff hikes to

SPUs. The tariff hikes though a positive have not been sufficient to cover revenue gaps

reported by SPUs in some states and might not prevent further creation of regulatory assets.

India Ratings is further concerned about the regularity of such tariff hikes in future and

implementation of the monthly fuel and power cost adjustment, given the political influence of

the state governments on the regulator and push back from the consumers.

Merchant Prices to Rise: Merchant tariffs may increase due to high deficits in energy and

power, low PLFs for available capacities due to fuel shortages, low capacity addition, high fuelprices and increasing percentage of imported coal in overall coal supply.

Slow Progress on Captive Blocks: India Ratings believes that the de-allocation of captive

coal blocks (CCBs) and bank guarantee invocation by the inter-ministerial group is a step in the

right direction as it weeds out non-serious allottees. However, it may not result in meaningful

contribution from CCBs, given the multiple issues faced by allottees like forest clearance, land

acquisition, mining lease and lack of coordinated efforts from stakeholders.

What Could Change the Outlook

Sponsor/Sovereign Ratings: Any change in the respective governments rating outlook could

lead to a similar change in its owned companies Outlook.

Fuel and Reforms: Uncertainty over timing, extent and implementation of the restructuring

package, regularity of tariff hikes in the future and lower-than-expected fuel availability could

result in a change in the outlook to negative from stable.

Figure 1

8%8%

83%

0

20

40

60

80

100

Positive Stable Negative

Rating Outlooks

(%)

Source: India Ratings

Related ResearchPower Discoms Debt Restructuring A Short-Term Positive (September 2012)

Analysts

Vivek Jain+91 11 4356 [email protected]

Salil Garg

+91 11 4356 [email protected]

Rohit Sadaka+91 33 4006 [email protected]

Rating Outlook

SS TT AA BB LL EE


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2013 Outlook: Indian PowerJanuary 2013

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Fuel Risk Remains High

Gas-Based Plants Under Stress: India Ratings sees continued stress on gas-based power

plants in 2013 in terms of lower debt service coverage ratio and lower profitability as it would be

difficult to ramp up the output from the KG-D6 offshore field in the immediate future. Production

from the gas field declined to 26mmscmd in November 2012 from the peak of 61mmscmd inMarch 2010, due to which domestic natural gas availability declined sharply to 109mmscmd

from the high of 154mmscmd. This resulted in lower gas supply to the end-user industries

including the power sector due to which gas-based power plants have come under stress.

Figure 2

1,000

2,000

3,000

4,000

5,000

Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12

Total gas output Gas output from Pvt/JVC

(SCMm)

Monthly Domestic Natural Gas Output

Source: IRR, Ministry of Petroleum and Natural Gas

Some power plants have been able to recover fixed charges by showing availability based on

Naptha, while some others power purchase agreements (PPAs) do not allow capacity

declaration on Naptha leading to under-recovery of fixed costs.

The operator of the block has submitted a revised field development plan cutting the reserves

by two-third to 3.4 trillion cubic feet. Moreover, continued technical challenges in terms of waterand sand ingress, lower pressure and delays in regulatory approval to carry out a work-over to

plug problem have led to the number of production wells reducing to 11 during December 2012

from the high of 18 wells. The high cost of imported LNG at USD14/mmbtu makes its use

economically unviable as generation costs would be high at INR8.4/kwh.

Coal-Fired Plants Also Under Stress: India added 34GW of coal-fired capacity over FY10-

FY12, requiring 156mMT of coal (calorific value: 4000kcal/kg). However, dispatch to power

sector increased by merely 24mMT over FY10-FY12, with CIL contributing 16.5mMT, thus

leading to increasing reliance on imported coal to bridge the deficit.

CIL had not signed FSAs post FY09; therefore, given the increasing gap and industry demand,

a presidential directive was issued in April 2012 to CIL to sign FSAs with the power plantscommissioned post FY09 and likely to be commissioned till FY15. CIL proposed a model FSA

with very low penalties. The terms of the FSA were met with resistance by the generators. Post

deliberations most of the issues with respect to the penalty clauses in the FSAs have been

resolved, and CIL has signed 35 FSAs out of 114 FSAs till December 2012. CIL will need to

supply 81% domestic and 19% imported coal to meet the 80% of annual contracted quantity

(ACQ).

The 114 FSAs for plants commissioned post FY09 and likely to be commissioned till FY15

have a total cumulative capacity of 51GW and with letters of assurance quantity of 216mMT.

Assuming only 65% to be met through domestic coal, CIL will have to increase its despatch to

the power sector to 436mMT by FY15 (a CAGR of 12%), which looks difficult.

Given the current scenario and moderate growth expectation in the domestic coal production,

India Ratings expects either the capacity addition to be slower than envisaged or plants to


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operate at sub-optimal PLFs. Over the last few months, the PLFs of thermal power plants have

declined.

Figure 3

0

20

40

60

80

100

Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12

(%)

Monthly Plant Load Factor

Source: IRR, CEA

The use of imported coal will be limited due to boiler design which allows only partial blending

of higher gross calorific value imported coal and the economics and logistics involved in the

transportation of imported coal.

CCB Progress Slow: Around 80 captive coal blocks (CCBs) were allotted to power sector

entities till December 2011, of which only a dismissal 15 CCBs could reach production resulting

in production of 25.8mMT in FY12. These 15 blocks were allocated prior to 2003. Only one

block allocated post 2005 could reach the production stage by December 2011.

Delays in approval for forest clearance, mining lease, land acquisition and environment mining

plan are key reasons for delays in mine development.

Figure 4

0

10

20

30

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

0

2

4

6

8

10

Coal output (LHS) % of capacity through CCBs as a % of overall coal based capacity (RHS)

Output from CCBs

(MTm)

Source: MoC, India Ratings

(%)

An inter-ministerial group (IMG) was formed to review the progress made by CCBs, and

recommended de-allocation of CCBs and invocation of bank guarantees of few allottees as

they were not able to meet the milestones. India Ratings believes that this is a step in the right

direction as it weeds out non-serious allottees.

However, the agency does not expect CCBs to contribute meaningfully to the overall domestic

coal output without coordinated effort from all stake holders. This may also slowdown further

investments in the mining sector, leading to further CCB de-allocation and BG invocation.

Tariff Hikes and Operational Efficiencies Hold the Key

Over the past year, a number of the state electricity regulators have allowed tariff hikes to the

discoms. In some states, tariff hikes have been steep while in other moderate to low. Figure 5


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shows average tariff increase across states.

Figure 5Tariff Hikes Across StatesState Period Percentage Hike

Tamil Nadu April 2012 37Kerala July 2012 30Delhi July 2012 26Andhra Pradesh April 2012 20Rajasthan August 2012 18Uttar Pradesh October 2012 18Chhattisgarh April 2012 17Maharashtra August 2012 17Haryana March 2012 17Jharkhand August 2012 16Himachal Pradesh April 2012 13Bihar March 2012 12West Bengal March 2012 10Punjab July 2012 12Madhya Pradesh March 2012 8Uttarakhand April 2012 7

Gujarat June 2012 2Source: India Ratings, SERC Orders, Media Reports

Most discoms had not revised tariffs for years, and hence have taken steep tariff hikes. Though

India Ratings believes that such tariff hikes are positive, the current hikes solve the problem

only partially on two accounts. Firstly the tariff hikes have not been sufficient to cover the

current revenue gap reported by discoms and secondly the hikes will not result in recovery of

regulatory assets. The comfort would only come from slowing down of the pace of regulatory

asset creation thus partly mitigating the stress on the liquidity profile.

The agency believes the current tariff hikes were forced upon the discoms due to the stoppage

of short-term credit from the banking system and pressure from the central government.

Therefore, as the bank funding begins to flow again, the regularity of such hikes will become

challenging.

Moreover, most regulators have hiked tariffs for industrial consumers substantially sparing the

domestic consumers. This has resulted in push back from the industrial consumers. India

Ratings believes the ability of the discoms to hike tariffs for a particular category of consumer

while sparing the others or in effect cross-subsidising is limited. Therefore, continued price

increases over a short term might not be a feasible option for discoms.

Also, in the above scenario, the implementation of the monthly fuel and power cost adjustment

might be difficult due to the political influence of the state governments on the regulator.

India Ratings also believes that increasing tariffs alone would not lead to turnaround at the

discom level. Tariff hikes along with operational efficiencies in terms of lower aggregate

technical and commercial (ATC) losses, timely receipt of subsidy from the respective state

governments, control over O&M costs would lead to a sustained turn-around at the discom

level.

State Electricity Board Restructuring: The Cabinet Committee on Economic Affairs in

September 2012 approved a financial restructuring package for the state discoms. As per the

package, 50% of the short-term loans of discoms will be taken over by the state governments

and the balance 50% will be restructured by the lenders with a three-year moratorium on

principal. The package is voluntary and is currently being worked out by discoms in 10 states

namely Rajasthan, Haryana, Uttar Pradesh, Tamil Nadu, Andhra Pradesh, Punjab, Karnataka,

Jharkhand, Himachal Pradesh and Kerala.

India Ratings believes that loan restructuring is a positive step in the short term for the entire


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value chain of the power sector. However, its long-term benefits would depend on the ability of

discoms to lower ATC losses, hike tariffs and control operational costs such that the average

cost of supply decreases and average revenue increases. If the discoms are unable to achieve

operational efficiencies, the package would only have successfully deferred the problems and

not resolved them.

Merchant Prices to Rise

The merchant prices remained soft in FY12, however India Ratings expects merchant prices to

rise during FY13 primarily due to improvement in the liquidity profile of the SPUs post the tariff

hikes, debt restructuring package and higher fuel prices. The agencys expectation is also

supported by the continued high energy and peak deficits, increasing percentage of imported

coal in overall coal supply and low PLFs for available capacities due to fuel shortage.

Due to the continued shortage of domestic coal and with increasing reliance on imported coal

in the overall coal requirements of India, India Ratings expects merchant prices to be at a

premium to the marginal cost of power produced through imported coal prices. Currently

assuming USD80/tonne, 5,500kcal/kg coal, the cost of generation assuring reasonable returnsto generators would be INR4.1/kwh. India Ratings expects average prices to increase to

INR4.0/kwh-INR4.35/kwh.

2012 Review

In line with India Ratings expectation, reforms measures were initiated with state regulators

allowing tariff hikes in most of the states. Reliance on imported coal increased and domestic

availability of coal could not keep pace with the domestic capacity addition, leading to lowering

of PLFs.

The credit profiles of large national power companies remained in line with the agencys

expectations. This along with their strong operational and financial performance led to the

ratings and Outlooks of these companies remaining stable.

India Ratings upgraded the ratings of Noida Power Company Limited (NPCL) to IND A from

IND A- in January 2013 as the state regulator allowed an effective hike of 42.5% to NPCL

including an 8% regulatory surcharge. The Outlook is Positive. India Ratings expects a

continuous improvement and expansion in the companys cash flow from operations as the

tariff hike will lead to liquidation of past regulatory asset and non-creation of fresh regulatory

assets.


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Ratings Headroom

Figure 6India Power Companies: Ratings

Ratings headroom

EntityNational Long-TermRating Outlook High Medium Low

Net debt(INRm)

Adj. netdebta/operating

EBITDAR (x)Free cash

flow (INRm)

AD Hydro Power Limited IND BBB Stable x 14,435 -2,760.4 -1,537Damodar Valley Corporation IND AA Negative x 189,422 19.2 -57,827Delhi Transco Limited IND A+ Stable x 12,629 3.54 -6,754Malana Power Company Limited IND A Stable x 3,093 3.6 748NHPC Limited++ IND AAA Stable x 115,618 2.4 -13,774NTPC Limited++ IND AAA Stable x 341,133 2.40 -84,759Neyveli Lignite Corporation+ IND AAA Stable x -12,710 -2.0 -6,962Noida Power Company Limited++ IND A Positive x 3,293 4.1 -1,593Power Finance Corporation Limited IND AAA Stable x n.a. n.a. n.a.Reliance Infrastructure Limited IND AA Stable x 28,393 2.4 -23,079Rural Electrification Corporation Limited IND AAA Stable x n.a. n.a. n.a.Tata Power Trading Company Limited IND BBB+ Stable x -637 -3.2 -37

Full-year numbers to March 2011, except + denotes March 2009 ++denotes March 2012Power Finance Corporation, Rural Electrification Limited and IREDA Limited are financial institutions, financial metrics not comparable with corporatesa

Net debt plus capitalisation of operating lease obligations plus other off-balance-sheet debtSource: India Ratings


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Annex 1: India Ratings-Rated Power Companies

Figure 7Issuer RatingsEntity Long-Term rating Outlook Short-Term rating

AD Hydro Power Limited IND BBB StableAES Chhattisgarh Energy Private Limited - IND A3(SO)Damodar Valley Corporation IND AA- NegativeDelhi Transco Limited IND A+ Stable IND A1

Malana Power Company Limited IND A- StableMeghalaya State Electricity Board IND BBB+(SO) -Neyveli Lignite Corporation IND AAA StableNHPC Limited IND AAA StableNTPC Limited IND AAA StableNoida Power Company Limited IND A Positive IND A1Power Finance Corporation Limited IND AAA Stable IND A1+PTC India Limited - IND A1+Reliance Infrastructure Limited IND AA Stable IND A1+Spectrum Power Generation Limited IND BB- StableTalwandi Sabo Power Limited IND AA+(SO) StableTata Power Trading Company Limited IND BBB+ Stable IND A2+

Source: India Ratings


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