Moody's Investors Service says that NTPC Limited's (Baa3 positive) recent announcement for the continuation of the Payment Security Mechanism is credit positive.
The Payment Security Mechanism is based on tripartite agreements between the central government, state governments and the Reserve Bank of India, and these agreements ensure payments to NTPC in the event of default by state owned distribution companies. The current agreements with various states expired in October 2016 and the Government of India has recently given its approval for its extension.
NTPC has enjoyed a good track record of timely and full payments from state owned distribution companies over last 12 years since the payment security mechanism has been in place, despite the weak financial health of the distribution companies. The root problems affecting the distribution companies credit quality remains a poor network infrastructure and the distortion caused by the supply of subsidized power to certain sectors which will gradually improve.
Of the 31 states in India, most states have agreed to be part of the extended scheme. NTPC will have to sign the agreements with these participating states individually for the extension of the mechanism to take effect.
As per NTPC's management, there are no changes in the terms and conditions of the new agreement. However, the tenor of the agreement with different states will vary. NTPC is planning to complete the signing of agreement with individual states in December 2016.
The methodologies used in this rating were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
NTPC Limited is engaged in the construction and operation of power plants. It is the largest power generating company in India (Baa3 positive), with an installed generation capacity of 47,228 megawatts (MW) as on 30th November 2016. As of end-November 2016, it had a nationwide presence through its coal-based (35,085 MW), gas-based (4,017 MW), hydro (800MW), renewables (360 MW) and joint-venture projects (6,966 MW). It generated revenue of INR787 billion ($11.9 billion) in the fiscal year ended 31 March 2016 (FYE03/2016).
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