Key Rating Drivers & Detailed Description

Strengths:

Strong business risk profile: OTPC has signed PPAs with distribution companies (discoms) of north-eastern states for ~683 megawatt (MW), covering 94% of its total capacity. The PPAs, valid for 25 years from the date of commencement of commercial operations, are based on the classic two-part tariff structure of the Central Electricity Regulatory Commission (CERC), which ensures complete recovery of approved fixed cost, including debt servicing, and a fixed return on equity of 15.5%, subject to the plant meeting a normative PAF of 85%. Power generated from the remaining 43 MW (6%) capacity is sold through exchanges and bilateral arrangements.

Competitive advantage because of gas supply from ONGC: OTPC has signed a gas sale-and-purchase agreement with ONGC that meets its fuel requirement for 15 years, with a provision to extend by two 5-year terms. Not only does this insulate OTPC from fuel risk, but the supply of gas at a firm price with escalation of 4% every year, also ensures a competitive tariff over the long term.

Financial and managerial support from ONGC: OTPC is an initiative of ONGC for the monetisation of its unutilised stranded gas reserves in Tripura. Besides being the gas supplier to the project, ONGC is the largest shareholder (50% stake) in OTPC. Of the 11-member board of directors of OTPC, four are representatives of ONGC, including the chairperson. Significant control of ONGC and the strategic importance of OTPC underscore the parent’s economic rationale and moral obligation to support the latter.

Weaknesses:

Lower than-normative, though improving, PAF, resulting in under-recovery of project cost: OTPC’s plant requires about 2.9 million metric standard cubic metre per day (mmscmd) of gas to run at the normative PAF of 85% to ensure full recovery of cost. While the plant had been running on lower PAF (less than 85%) due to inadequate gas supply, PAF improved to ~78% during fiscal 2023, a 13% rise over fiscal 2022. PAF is expected to remain above 75% for fiscal 2024. While there will be under-recoveries in cost, the debt service coverage ratio (DSCR) should remain comfortable over the medium term. However, any significant change in the gas supply or technical issues impacting the PAF are key rating sensitivity factors.

Exposure to weak counterparties: OTPC sells power to discoms having weak credit risk profiles and faces the risk of delay in payments. However, being one of the lowest-cost power producers in the region, the company ranks high in the merit-order dispatch of these discoms, which ensures timely payment. Receivables (excluding unbilled revenue) sustained at 48 days as on March 31, 2023, compared to 43 days on March 31, 2022. Receivables are expected to sustain over the medium term driven by timely payment by discoms and the new Electricity (Late Payment Surcharge and Related Matters) Rules, 2022. A revolving letter of credit mechanism and option to sell power through exchange, if discoms default on payment, support the ratings. Nonetheless, timely receipt of dues will remain a key monitorable.

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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