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2013 Outlook: Indian Power

Implementation and Continuance of Reforms Hold the Key
Outlook Report
Rating Outlook 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 the supply 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.
8% Stable Negative

STABLE

Figure 1

Rating Outlooks
(%) 100 80 60 40 20 0 Positive 8% 83%

Source: India Ratings

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 the restructured 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 fuel prices 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.

Related Research
Power Discoms Debt Restructuring A ShortTerm Positive (September 2012)

Analysts
Vivek Jain +91 11 4356 7249 vivek.jain@indiaratings.co.in Salil Garg +91 11 4356 7244 salil.garg@indiaratings.co.in Rohit Sadaka +91 33 4006 5885 rohit.sadaka@indiaratings.co.in

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.

www.indiaratings.co.in

16 January 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 in March 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

Monthly Domestic Natural Gas Output

Total gas output (SCMm) 5,000 4,000 3,000 2,000 1,000 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12 Source: IRR, Ministry of Petroleum and Natural Gas Gas output from Pvt/JVC

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 water and 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 FY10FY12, 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 plants commissioned 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

2013 Outlook: Indian Power January 2013

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operate at sub-optimal PLFs. Over the last few months, the PLFs of thermal power plants have declined.
Figure 3

Monthly Plant Load Factor

(%) 100 80 60 40 20 0 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 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

Output from CCBs

Coal output (LHS) (MTm) 30 20 % of capacity through CCBs as a % of overall coal based capacity (RHS) (%) 10 8 6 4 2 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Source: MoC, India Ratings 0

10

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 5

Tariff Hikes Across States

State Tamil Nadu Kerala Delhi Andhra Pradesh Rajasthan Uttar Pradesh Chhattisgarh Maharashtra Haryana Jharkhand Himachal Pradesh Bihar West Bengal Punjab Madhya Pradesh Uttarakhand Gujarat
Source: India Ratings, SERC Orders, Media Reports

Period April 2012 July 2012 July 2012 April 2012 August 2012 October 2012 April 2012 August 2012 March 2012 August 2012 April 2012 March 2012 March 2012 July 2012 March 2012 April 2012 June 2012

Percentage Hike 37 30 26 20 18 18 17 17 17 16 13 12 10 12 8 7 2

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 discom level. technical and governments, level. also believes that increasing tariffs alone would not lead to turnaround at the Tariff hikes along with operational efficiencies in terms of lower aggregate commercial (ATC) losses, timely receipt of subsidy from the respective state control over O&M costs would lead to a sustained turn-around at the discom

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 returns to 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.

2013 Outlook: Indian Power January 2013

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Ratings Headroom
Figure 6

India Power Companies: Ratings

Ratings headroom National Long-Term Rating IND BBB IND AA IND A+ IND A IND AAA IND AAA IND AAA IND A IND AAA IND AA IND AAA IND BBB+ Adj. net Net debt debta/operating Free cash (INRm) EBITDAR (x) flow (INRm) 14,435 -2,760.4 -1,537 189,422 19.2 -57,827 12,629 3.54 -6,754 3,093 3.6 748 115,618 2.4 -13,774 341,133 2.40 -84,759 -12,710 -2.0 -6,962 3,293 4.1 -1,593 n.a. n.a. n.a. 28,393 2.4 -23,079 n.a. n.a. n.a. -637 -3.2 -37

Entity AD Hydro Power Limited Damodar Valley Corporation Delhi Transco Limited Malana Power Company Limited NHPC Limited++ NTPC Limited++ Neyveli Lignite Corporation+ Noida Power Company Limited++ Power Finance Corporation Limited Reliance Infrastructure Limited Rural Electrification Corporation Limited Tata Power Trading Company Limited

Outlook Stable Negative Stable Stable Stable Stable Stable Positive Stable Stable Stable Stable

High

Medium

Low x x x

x x x x x x x x x

Full-year numbers to March 2011, except + denotes March 2009 ++denotes March 2012 Power Finance Corporation, Rural Electrification Limited and IREDA Limited are financial institutions, financial metrics not comparable with corporates a Net debt plus capitalisation of operating lease obligations plus other off-balance-sheet debt Source: India Ratings

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Annex 1: India Ratings-Rated Power Companies
Figure 7

Issuer Ratings
Entity AD Hydro Power Limited AES Chhattisgarh Energy Private Limited Damodar Valley Corporation Delhi Transco Limited Malana Power Company Limited Meghalaya State Electricity Board Neyveli Lignite Corporation NHPC Limited NTPC Limited Noida Power Company Limited Power Finance Corporation Limited PTC India Limited Reliance Infrastructure Limited Spectrum Power Generation Limited Talwandi Sabo Power Limited Tata Power Trading Company Limited
Source: India Ratings

Long-Term rating IND BBB IND AAIND A+ IND AIND BBB+(SO) IND AAA IND AAA IND AAA IND A IND AAA IND AA IND BBIND AA+(SO) IND BBB+

Outlook Stable Negative Stable Stable Stable Stable Stable Positive Stable Stable Stable Stable Stable

Short-Term rating IND A3(SO) IND A1

IND A1 IND A1+ IND A1+ IND A1+ IND A2+

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2013 Outlook: Indian Power January 2013