Fitch Ratings has today affirmed India's Malana Power Company Limited's (MPCL) National Long-term rating at 'A-(ind)' (A minus(ind)) with a Stable Outlook, and its INR986.7m long-term bank loans also at 'A-(ind)' (A minus (ind)). At the same time, the agency has affirmed the 'AAA(ind)(SO)' rating on MPCL's INR250m secured non-convertible debenture programme, based on an unconditional and irrevocable guarantee from Infrastructure Leasing & Financial Services Limited ('AAA(ind)'/'F1+(ind)'). Simultaneously, the agency has assigned a rating of 'F1(ind)' to the INR500m short-term bank loans of MPCL.
MPCL's ratings continue to factor in the healthy operating performance of its 86MW merchant power plant and its solid earnings backed by strong tariffs for peak load merchant power. Under the current power sale agreement valid till June 2009, the off-take for the power is at a rate of INR6.70 per unit which is higher than rates contracted in earlier years. The power sale agreement for the next year (July 2009 to June 2010) is expected to be closed at similar rates. Additionally, the expected de-leveraging by MPCL with repayment of its own outstanding debt by FY13, and the existence of a debt service reserve account covering a minimum of six months of debt service requirements, provides further support to the ratings.
Rating constraints stem mainly from the increased support extended by MPCL to its 88%-owned subsidiary, AD Hydro Power Limited (AD Hydro, 'BBB(ind)'), consequent to a second cost overrun in the subsidiary's 192 MW hydro power project. The agency notes that AD Hydro has continued to face geological surprises in the midst of constructing tunnels for the project, leading to cost and time overruns; the completion date for the entire project has been extended to June 2010 from March 2009. However, one of the tunnels that will carry seventy percent of the total water for the power plant is now scheduled for commissioning by November 2009, which would enable partial commencement of operations and generation of cash flows by AD Hydro.
Nevertheless, the quantum of total cost overruns is now INR9.49bn, out of which the second overrun of INR1.78bn is to be funded entirely through subordinated debt by MPCL. Fitch notes that while part of the company's contribution in AD Hydro has been funded through equity infusions by its sponsors, MPCL has also used its internal accruals and raised short-term debt of INR750m to part finance its investments in AD Hydro, and would need to raise more debt to complete its investments. This additional debt of INR750m was not incorporated into earlier ratings; although the impact on its financial profile is partially offset by the stronger earnings and low off-take risks enjoyed by the company. Meanwhile, the ratings continue to factor in the corporate guarantee extended by MPCL to the senior lenders of AD Hydro for INR10.4bn. Fitch views that any further cost overrun in AD Hydro's 192MW power project leading to an increase in MPCL's support to AD Hydro, either in the form of funding or raising of the annual liability cap under corporate guarantee, would prove negative for the ratings.
The agency also notes that during FY08, MPCL was awarded the bid to develop a 200MW hydro-electric project in Himachal Pradesh and that it has made an investment of INR610m towards the license fee. MPCL's financial obligation to this project would be clear after the finalisation and approval of the detailed project report, which is under preparation. Further commitment by MPCL to invest into this project, or financial guarantees provided to support the project funding that could deteriorate its credit metrics, would also constitute negative rating triggers.
During the 9MFY09, MPCL earned net revenues of INR1.69bn and operating EBITDAR of INR1.56bn. The EBITDA and net income margins have improved to 92% and 73%, respectively, in 9MFY09 on the back of an increase in the tariffs. MPCL is promoted by Bhilwara Energy Limited (part of the LNJ Bhilwara Group, which owns 51% of the common equity) and SN Power, Norway. The company owns and operates an 86MW hydroelectric plant in the Kullu district of Himachal Pradesh, India.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
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