NCC Power Projects's bank loans rated at 'Fitch BBB-(ind)'/Stable
The SPV is a joint venture between NCC Infrastructure Holdings (55%), a 100% subsidiary of NCC Ltd., and Gayatri Energy Ventures Private Limited (45%), a 100% subsidiary of Gayatri Projects Limited.
The ratings are constrained by the lack of firm off-take arrangements for the long-term sales of power. While 25% of the output is to be sold on a merchant basis, no power purchase agreement (PPA) has been executed as yet for the balance 75%, envisaged to be sold through a long-term power sales agreement. However, Fitch notes that NCCPPL has been shortlisted as a qualified bidder (L4) under Case 1 bidding invited by the state-owned utility in Andhra Pradesh for the purchase of 500MW of power for a period of 25 years. The revenue risk is also mitigated by the corporate guarantee extended by the sponsors, applicable till the execution of a PPA, for 75% of the capacity. This contingent guarantee is above the break-even capacity of 61.5%, necessary to ensure a debt service coverage ratio (DSCR) of at least 1x.
Although Fitch does not rate both the sponsors, it draws comfort from the financial strength and operational track record of the holding companies. While the guarantee can be withdrawn irrespective of the price at which PPAs are concluded or the quality of the off-taker counterparties, the agency believes that sponsors have sufficient incentive to protect the project's economic interests or extend financial support as per the guarantee.
India's power deficit scenario and rising cost of generation should allow the project to find firm buyers at the tariff assumption of Rs. 3.5/kWh in the base case. In this connection, the project's ability to make fuel supply arrangements as envisaged becomes critical for a competitive cost of generation. NCCPPL has a 12-year fuel supply agreement (FSA) with Singapore-based APOLLONIUS Coal and Energy Ltd., a NCC group company (a 50% equity stake), for the supply of 1.8 MTPA coal from an Indonesian mine. The FSA counterparty has an 80% stake in the coal mine. Considering frequent changes in the Indonesian regulatory framework concerning coal exports, NCCPPL's ability to successfully secure coal supplies in a timely manner at the contracted price, which is at a substantial discount to the international spot prices, is a key rating factor.
NCCPPL has received a letter of assurance from the government-owned South Eastern Coalfields Limited and Mahanadi Coalfields Limited for the supply of 2.1 MTPA each of F-grade coal, accounting for 70% of the total requirement. However, the quantity of assured supply for the project is uncertain given the systemic coal shortage in the country, sluggish ramp up of domestic coal production and supply rationing by the state-owned coal mines. Fitch notes that, by virtue of being a coastal power project, logistics of importing coal - to make up for domestic deficiency - would be easier and cheaper but the price of coal could impair project economics.
The ratings are also constrained by the inherent execution risks associated with a large greenfield thermal power project in a nascent stage of construction. Management expects to achieve the commercial operations date of unit 1 and unit 2 by June 2015 and September 2015, respectively. However, Fitch notes that NCCPPL has the requisite land and secured all the major mandatory approvals for the project including environmental clearance. A fixed-price and fixed-time engineering, procurement and construction (EPC) contract with NCC Ltd. also reduces the execution risk to a large extent. Furthermore, NCC Ltd. has a boiler and turbine generator (BTG) package supply contract with Harbin Power Engineering, a leading Chinese original equipment manufacturer. Fitch notes that the EPC contract has adequate performance warranty and provisions for liquidated damages, in line with other Indian projects. However, the project is yet to appoint an operations and maintenance contractor.
NCCPPL has significant foreign currency exposure as the BTG contract (38.3% of the project cost) is fixed in USD, while the source of funding is denominated in INR. However, the risk is mitigated by the sponsors undertaking to fund any cost overrun through additional equity infusion. The bank debt's variable interest rate (currently 13.58%), with a reset every three years, could potentially add to volatility of cash flows. While a debt service reserve account covering six months of principal and interest should act as a cushion, the fact that the account is not funded upfront but envisaged to be created out of operational cash flows somewhat reduces its efficacy.
The rating may be downgraded if there is a material delay in project completion or cost overruns, failure to execute long-term PPAs with strong counterparties or an inability to secure coal supplies - both domestic and imported - as envisaged in terms of both quantities and price, absent sponsor support.
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India Infoline Research Team / 10:47, Aug 24, 2015
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