Fitch Ratings says in a new report that the Outlook on the National ratings of Indian power sector issuers remains Stable in view of some progress on the fuel availability issue and the possibility of debt restructuring of state power utilities (SPUs) in seven states.
Independent power producers (IPPs) are striving hard to secure coal supplies for their new power-generation capacities. Coal India Limited, the state-owned coal producer, has agreed to enter into fuel-supply agreements (FSAs) with 48 new projects, albeit with a very low penalty (0.01%) for non-supply. Many private sector IPPs, hard-pressed for domestic coal, have signed FSAs with this low penalty clause. However, larger state-owned IPPs (including NTPC Limited ('BBB-'/Negative, 'Fitch AAA(ind)'/Stable)) have held back for the lack of an increase in penalty.
The government of India is trying to facilitate a solution with a higher penalty clause that will kick in for supplies lower than 65% of the contracted quantity, although CIL is yet to agree. Resolution of the penalty issue in FSAs is likely in the near term, yet coal supply issues will continue to affect investor interest in the power sector.
The government is in the advanced stages of formulating a plan for restructuring the debt of SPUs in Tamil Nadu, Uttar Pradesh, Rajasthan, Madhya Pradesh, Andhra Pradesh, Haryana and Punjab. The proposed financial restructuring packages seek to shift 50% of the debt burden to the respective state governments, and also to postpone repayment of principal by three years to allow loss-making utilities to achieve an operational and financial turnaround.
Substantial hikes in retail power tariffs in some states (Tamil Nadu 37%, Delhi 26% and Punjab 12%) in 2012 was a positive sign, indicating the inevitability of passing on increased fuel costs to consumers. The retail tariff hikes have helped the margins of SPUs and thus somewhat restored investor confidence. Fitch expects institutionalisation of the mechanism for passing on fuel costs on a regular-rather-than-ad-hoc-basis, with the introduction of fuel and power purchase cost adjustment on a monthly or quarterly basis in some states.
Fitch-rated entities in the sector are mostly power generation companies and thus likely to benefit from lower fuel and counterparty risks. However, delays in the resolution of challenges in the current operating environment - including fuel availability and price risks, counterparty risks and regulatory risks - could lead to a change in the sector outlook to negative.
Some of the other Fitch-rated power sector entities are: NHPC Limited ('BBB-'/Negative, 'Fitch AAA(ind)'/Stable), Delhi Transco Limited ('Fitch A+(ind)'/Stable), Reliance Infrastructure Limited ('Fitch AA(ind)'/Stable) and Tata Power Trading Company Limited ('Fitch BBB+(ind)'/Stable).