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CRISIL has assigned its ‘CRISIL A+/Stable’ rating to the long-term debt of ONGC Tripura Power Company Ltd (OTPC).

The rating reflects the financial and managerial support that OTPC gets from its largest shareholder, Oil and Natural Gas Corporation Ltd (ONGC; rated ‘CRISIL AAA/Stable/CRISIL A1+’), and competitive advantages that OTPC is likely to have because of gas supply from ONGC on a firm-price basis. The rating also reflects the progress made by OTPC so far in its ongoing project. These rating strengths are partially offset by OTPC’s exposure to implementation-related risks in its ongoing project, including synchronisation of transmission project and risks related to weak counter parties post implementation.

OTPC is an initiative of ONGC for monetisation of its unutilised gas reserves in Tripura. Besides being the gas supplier to the project, ONGC is also the largest shareholder in OTPC, with current shareholding of 50 per cent. OTPC’s board of directors consists of four representatives of ONGC, including the Chairman. ONGC is also implementing an upstream project, which includes laying pipeline infrastructure for gas supply to the power plant. CRISIL believes that ONGC’s majority control of OTPC, and OTPC’s strategic importance to ONGC, underscore ONGC’s moral obligation and economic rationale to support OTPC. OTPC has already signed a Gas Sale and Purchase Agreement (GSPA) with ONGC, which meets the fuel requirement for the project for 15 years with provision for extension by two additional five-year terms. The supply of gas at a firm price would ensure a competitive tariff for the project over the long term. Furthermore, other contractual arrangements such as Engineering, Procurement And Construction (EPC) contract with Bharat Heavy Electricals Ltd (BHEL; rated ‘CRISIL AAA/Stable/CRISIL A1+’), Power Purchase Agreements (PPAs) with north-eastern states, and funding tie-ups, also help mitigate development and commercial risks associated with the project. OTPC has obtained approvals and clearances, including environment clearance, for the project.

OTPC, however, remains exposed to residual risks related to timely implementation of the project. The project is exposed to the risk of unavailability of transmission infrastructure which is critical for power evacuation and supply. Heavy rains and rough terrain delayed the transport of gas turbine and steam turbine on the site. Both the units have, however, reached the site now. OTPC expects commercial production at the first unit to commence by March, 2012, against earlier planned in December, 2011; the second unit is expected to commence operations by July 2012.

After completion of the ongoing project, OTPC would sell around 87 per cent (about 628 megawatt [MW]) of its total power production to various north-eastern State Power Utilities (SPUs), which have weak credit risk profiles. Although OTPC is assured of complete recovery of fixed costs because of the take-or-pay nature of its PPAs, the company will remain exposed to risks of delay in payments by the north-eastern SPUs. Nevertheless, OTPC’s receivables will be secured by a revolving letter of credit mechanism, and it also has an option of open access in case of default of payment.

Outlook: Stable 

CRISIL believes that while a significant proportion of the implementation has been achieved, OTPC will continue to receive support from ONGC in case of any exigencies emanating from the residual implementation risk. The outlook maybe revised to ‘Positive’ if OTPC completes its project without significant time or cost overrun and stabilises its operations. Conversely, the outlook may be revised to ‘Negative’ or the rating may be downgraded if OTPC faces delays in the project, resulting in lower-than-expected revenues and profitability.

About the Company 

OTPC, which is a joint venture of ONGC, IL&FS Energy Development Company Ltd (IEDCL), and the Government of Tripura (GoT), is implementing a 726.6-MW combined cycle gas turbine (CCGT) power project in Palatana (Tripura). The proposed shareholding structure envisages ownership by ONGC of 50 per cent of OTPC’s equity shares, with IEDCL owning 26 per cent, and GoT owning 0.5 per cent. IEDCL has also undertaken for the placement of the remaining equity stake of 23.5 per cent through a public offering or with strategic investors.

The original project cost was at Rs.34.2 billion, to be funded in a debt-equity mix of 75:25. OTPC has already signed PPAs with the north-eastern state governments for supply of 87 per cent of power; the rest would be sold through the merchant power route.

The transmission system connecting Palatana and Bongaigaon (Assam), a distance of around 650 kilometers, for evacuation of power is being implemented by North East Transmission Company Ltd (NETCL) at a cost of Rs.17.70 billion (funded in a debt-equity mix of 80:20). NETCL is a joint venture of OTPC (proposed shareholding of 26 per cent), Power Grid Corporation of India Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’; proposed shareholding of 26 per cent), and the north-eastern state governments (proposed shareholding of 48 per cent). The construction of transmission line from project site to Bongaigaon is delayed mainly because environment clearance has not yet been obtained from Assam and Meghalaya governments. However, the transmission line established till Silchar will be used for the evacuation of power generated from the first unit. OTPC expects the transmission line to be commissioned by July 2012 for power evacuation for the second unit.

ONGC is India’s largest exploration and production company; it explores, develops, and produces crude oil and natural gas in India and internationally. The Government of India (GoI) is ONGC’s majority shareholder, owning 74.14 per cent of the company’s equity capital. ONGC functions under the administrative control of the Ministry of Petroleum and Natural Gas, GoI. For 2010-11 (refers to financial year, April 1 to March 31), ONGC, on a consolidated basis, reported a profit after tax (PAT) of Rs.228 billion on net sales of Rs.1.17 trillion, against a PAT of Rs.197 billion on net sales of Rs.1.02 trillion for the previous year. For the six months ended September 30, 2011, ONGC (standalone) reported, on provisional basis, a net profit of Rs.127 billion on net sales of Rs.388 billion, against a net profit of Rs.90 billion on net sales of Rs.319 billion for the corresponding period of the previous year.

ONGC FPO is likely to hit market by March 15. ONGC will file a red herring prospectus (RHP) by February 20. The government plans to raise Rs 13,000 crore (Rs 130 billion) through sale of 5% stake in ONGC.

"A tentative schedule has been drawn for the follow-on public offer, as per which the first road show will be held in Chennai on February 2 and the public offer will hit the market on March 15," the official said after the kick off meeting of the FPO on Monday.

Government's Shareholding in ONGC would come down to 69.14% from the current 74.14% after FPO. As a precursor to the share sale, ONGC will split equity shares with a face value of Rs 10 each into two shares of Rs 5 each.

For FPO ONGC has appointed two international auditors DeGolyer and MacNaughton and Gaffney, Cline and Associates to certify the company's oil and gas reserves.