The revised tariff norms by the Central Electricity Regulatory Commission (CERC) will have a negative impact on the margins of state-owned utilities such as NTPC, Power Grid and NHPC according to Standard & Poor’s Ratings Services.
However, the largest rating agency said this will not impact the ratings of these firms.
“While we think that the revised regulatory tariff structure is likely to weaken the operating performances of NTPC, NHPC and Power Grid, it is unlikely to affect the ratings of these companies,” Standard & Poor’s credit analyst Rajiv Vishwanathan said in a statement.
CERC, in its final guidelines for tariff fixation, has shifted the incentive structure to plant load factor (PLF) from plant availability factor (PAF) for the period FY14-FY19.
The regulator has also maintained the base return on equity on transmission systems at 15.5 per cent, which is much lower than 18-20 per cent sought by companies.
“The impact on ratings is unlikely because ratings on these companies incorporate some level of government support, in accordance with our methodology to assess government-related entities,” he said.
According to S&P, NTPC’s EBITDA (earnings before interest, tax, depreciation and amortisation) is likely to decline 10-12 per cent and net income to fall under the new tariff structure-all else being equal. “However, we anticipate that the EBITDA contribution from new marginal capacity will offset some of the impact of the tariff changes. As a result, we expect minimal change in NTPC’s absolute EBITDA in FY15 compared with our expectation of about Rs.18,000 crore in FY14,” the agency said.
S&P has forecast the company’s ratio of funds from operations (FFO) to debt will remain 13-17 per cent in FY15 and FY16.
According to the firm, NTPC’s EBITDA and net income will be weaker largely because the company won’t be able to enhance its return on equity as much, given that it will now have to use the 24-26 per cent effective tax rate from the 33 per cent corporate tax rate that it has been using so far, and incentives will now be based on PLF from the earlier PAF.
The revised tariff norms, however, are likely to have a smaller impact on NHPC and Power Grid mainly because both the companies currently apply the minimum alternate tax, which is closer to their effective tax rate. In addition, Power Grid will continue to earn incentives linked to plant availability.
“Nevertheless, the regulator has introduced stricter operational parameters for incentives through higher benchmark PLF for NHPC and higher benchmark PAF for Power Grid. These revisions could reduce the companies’ EBITDA by less than 5 per cent,” it said.
Consequently, S&P said, it expected the FFO-to-debt ratio for NHPC and Power Grid to remain between 17 per cent and 21 per cent and 8 per cent and 10 per cent, respectively.
