The ratings reflect the assured off-take of output under long-term power purchase agreements with MP Power Trade Company (MPTRADECO) - an entity owned by the Government of Madhya Pradesh. They also reflect little demand risk on account of high peak deficits (19% in FY07) in the state of Madhya Pradesh and satisfactory payment security mechanisms, including a letter of credit covering energy sales for 30 days - a feature common to power projects in India. The ratings also factor in the completion of the Omkareshwar Sagar project ahead of schedule and NHDC's operational track record of maintaining high plant availability for both its power plants, resulting in higher earnings from the sale of secondary energy and accrual of incentives. The regulator allows pass through of all costs and guarantees a minimum fixed return on equity, provided plant availability is maintained at benchmarks stipulated by it whereas the hydrology risk is borne by the buyer.
The ratings benefit from a one-notch uplift based on distress support expected from NHPC Ltd. (formerly known as National Hydroelectric Power Corporation Ltd. 'BBB-' (BBB minus)/'AAA(ind)'/Stable). NHPC is the majority shareholder in NHDC and maintains management control. It has contributed equity to NHDC's projects in the past and, with its controlling stake, Fitch expects NHPC to continue supporting NHDC financially, technically and managerially through its larger balance sheet and strong linkages with the Government of India. However, any dilution of linkages could act as a negative trigger to the rating.
The key concern for the ratings emanates from NHDC's sale of entire output to a single buyer - MPTRADECO. This, coupled with the weak credit profile of the Government of Madhya Pradesh, exposes it to concentration risk. The risk is partially mitigated by the payment track-record of MPTRADECO and provisions in the power purchase agreements which allow NHDC to sell power to third parties in case of default by the offtaker. Any material weakening of the credit profile of the offtaker/state government leading to increased receivables could have a negative impact on the ratings. The central regulator, Central Electricity Regulatory Commission (CERC), fixes multi-year tariffs on a five-year basis for the power plants of NHDC. While the tariff for Indira Sagar project is due for revision in 2009, the final tariff for Omkareshwar is being decided. Any significant disallowance of costs by the regulator or any change in tariff policy leading to lower tariffs may adversely affect the company's ratings.
NHDC is a 51%-49% joint venture between NHPC and Government of Madhya Pradesh. NHDC was incorporated on 1 August 2000 to develop the hydroelectric potential of the Narmada Basin. The company has two operating power plants, the 1000 MW Indira Sagar and 520MW Omkareshwar Sagar projects, situated in Madhya Pradesh.
