Ind-Ra Rates NHPC’s Proposed Tax-free Bonds at ‘IND AAA’/Stable

India Ratings and Research (Ind-Ra) has assigned NHPC Limited’s INR14.75bn (including a green shoe option of INR12.75bn) secured non-convertible taxable bonds a long-term rating of 'IND AAA’ with a Stable Outlook.

NHPC proposes to raise the bonds with a tenor of 15 years including a three-year moratorium period. The bonds will be repaid in 12 annual equal repayments beginning from the fourth year of issuance and up to the 15th year.  The funds raised through this issue are likely to be used by the company for meeting capital expenditure requirements of on-going projects and recoupment of expenditure already incurred.

KEY RATING DRIVERS

Regulated Operations:

NHPC operates its hydro plants under the cost-plus regulatory framework outlined by Central Electricity Regulatory Authority (CERC). The regulations are robust and lead to high cash flow predictability as they provide a post-tax return of equity of 15.5%-16.5% along with a reasonable recovery of all costs. Additionally, NHPC’s upcoming plants are likely to be under the same regulatory framework, reducing business risk. Also, the new CERC framework for FY14-FY19 does not affect hydro power developers.

Leverage to Moderate:  

NHPC’s financial leverage stood at 3.2x in FY14 (year end March)  on a full debt draw down for the commissioned capacity of 807MW, a share buyback leading to lower cash, lower generation and lower incentives. Ind-Ra expects the leverage to have declined in FY15 on a higher incentive income, incremental EBITDA from newly commissioned plants and the restart of Dhauliganga hydro power plant. However, a meaningful decline in the leverage could be some time away due to the 3,290MW under construction projects.

Work in Progress Decline to Aid Cash Flows:

NHPC’s operationalisation of four projects in FY14 led to a decline in capital work in progress to INR146bn (FY13: INR197bn) and increased the regulated equity base by INR20.4bn to INR99bn. This is likely to have improved return ratios and cash flows for NHPC in FY15. During FY14, NHPC commissioned four projects (TLDP-III-132MW, Nimmo Bazgo-45MW, Uri-II-240MW and Prabati-III -390MW) as expected. The fourth unit of Prabati III (130MW) was commissioned in May 2014, taking the capacity to 4,987MW.

Under-construction Projects Delayed:

NHPC’s four under-construction projects (3,290MW) with an estimated capital outlay of INR230bn are facing execution delays. Work on 2,000MW Subansiri Lower has been stalled since December 2011 and on 160MW TLDP-IV since March 2013. Till FY13, NHPC had been capitalising the costs related to these projects. However, NHPC expensed INR12.7bn related to these projects in FY14 on the advice of the Expert Advisory Committee of ICAI. If CERC were to disallow this expensed cost while arriving at the fixed cost of the project, the annual fixed cost allowed by CERC to NHPC on these projects could be affected. The projects could see an increase in costs if the execution timelines are further extended. Moreover, the capital cost estimates of TLDP-IV and Subansari Lower have been estimated at July 2010 and December 2010 price levels, while the actual capital costs would have increased.

Diversified Hydro Power Company:

NHPC has de-risked its business model through asset, river, counterparty and revenue diversification. It has achieved this by way of operating 18 hydro power plants with a capacity of 4,857MW at FYE14 on multiple rivers and selling to multiple counterparties. The company is also the largest hydro power generating company in India, contributing 12% to all-India hydro capacity at a standalone level.

GoI Support:

Ind-Ra has derived NHPC’s standalone ratings based on its business and financial profiles. The standalone ratings are equivalent to that of its parent - the government of India (GoI; Fitch Ratings Ltd ‘BBB-’/Stable)). However, if NHPC’s standalone ratings were to be lower than that of GoI, there is one notch support available to NHPC from GoI given its strategic importance. GoI held 85.96% in NHPC at FYE15 and is aiding NHPC in resolving issues pertaining to Subansiri Lower.

Efficient Operations:

Ind-Ra expects NHPC to have declared higher-than-normative average availability and higher generation in FY15. Increased generation would be driven by the 807MW newly commissioned capacity, restart of Dhauliganga and better water availability. This could lead to a strong capacity charge incentive and secondary energy income, aiding cash flows. During FY14, NHPC’s incentive income declined to INR3.3bn (FY13: INR3.9bn) on lower income from secondary energy income and unscheduled interchange as generation remained muted.

Counterparty Risk:

Ind-Ra expects NHPC to maintain its overall receivable position despite the weak financial health of state power utilities, its customers. The expectation is based on NHPC’s dominant position in the Indian hydro power sector, GoI ownership, presence of a letter of credit, ability to regulate power and prompt payment discounts. At a standalone level, receivables declined to INR18.5bn in FY14 (FY13: INR20.5bn). However, 52% of the receivables were greater than 60 days, primarily on account of INR8.7bn dues from Power Development Department, J&K.

RATING SENSITIVITIES

Negative rating guidelines include a significant build-up of dues from buyers, larger-than-expected capex, unfavourable regulatory changes, or weakening of linkages between GoI and NHPC.