NTPC to be most hurt by new power tariff order in India

Pre-tax returns to be impacted.

Fitch Ratings says that NTPC Limited, India's largest thermal power generator, would be the most hurt among the country's rated state-linked electricity utilities by the Indian electricity market regulator's final tariff order for the upcoming five-year regulatory period from April 2014 to March 2019. 

There is limited impact on the other two rated power utilities - NHPC Limited and Power Grid Corporation of India Ltd (PGCIL), which are both rated at 'BBB-' with Stable Outlooks.

Here's  more from Fitch Ratings:

Fitch estimates that the new tariff order by the Central Electricity Regulatory Commission (CERC) would reduce NTPC's pre-tax return on equity by around 350 bp. As a result, Fitch will trim its estimates for the company's EBITDA and profit after tax (PAT) from the financial year ending March 2015 (FY15) onwards by around 8%-11%. NTPC's net leverage was expected to increase over the next few years due to its large capex programme. The weaker returns arising from the tariff order means NTPC's net leverage would be higher than previously expected. While this will not have an impact on NTPC's current 'BBB-' ratings, which are constrained by India's ratings of 'BBB-' with Stable Outlook, it will however reduce the rating headroom of its unconstrained standalone rating of 'BBB'.

For the utilities, the CERC has maintained the post-tax return on equity, which is part of the formula to determine the capacity charge to customers, at 15.5% (with an additional 0.5% return for timely completion of projects). However, when utilities calculate their pre-tax return on equity, the order has been amended to allow the use of the effective tax rate for a particular year (typically around 25%) instead of the standard corporate tax rate ( around 33%). For utilities paying the Minimum Alternate Tax (MAT), the MAT rate (around 20%) will be allowed. This will have negative implications for NTPC as its returns were based on the corporate tax rate, and the change would reduce pre-tax return on equity by almost 300 basis points.

For thermal generation companies including NTPC, the threshold for full receipt of the capacity charge continues to be linked to a minimum plant availability factor (PAF), which has been cut to 83% for the first three years of the next control period from 85% previously, which will help reduce disincentives in certain plants.

However NTPC's profitability will be further reduced because incentives for thermal generators in the next regulatory period will be based on companies reaching a plant load factor (PLF) of at least 85%, rather than the PAF. PLF is dependent on the ability of the state electricity distribution companies' ability to offtake power from the plants. NTPC's coal-based power plants had an average PLF of 83% in FY13, with 10 of its 15 coal-based plants having PLFs of less than 85%. The coal-based plants' PLF further fell to 79% for the nine months ended December 2013, implying that even fewer of NTPC's plants would qualify for the incentives. None of NTPC's seven gas-based plants have PLFs over 85%. Furthermore, the CERC has tightened certain operational standards and required sharing of cost benefits with power distributors.

Fitch expects that the profitability of NHPC and PGCIL to fall only by 2%-4% from FY15. As such, their forecast credit metrics will remain largely unchanged from the agency's previous expectations. NHPC and PGCIL would remain relatively immune to the change in the tax used to calculate pre-tax return on equity as they use the MAT rate. NHPC's incentives would still continue to be linked to normative plant availability factor, although the CERC has raised the factor for three out of NHPC's 14 plants. PGCIL's incentives are linked to the transmission system availability factor, which has been increased to 98.5% (from the earlier 98%) for alternating-current systems and 96% (95% previously) for high-voltage direct-current systems.