The new electricity tariff order by the central power regulator could weaken the margins of Government-owned companies such as NTPC, NHPC and PowerGrid, according to Standard & Poor’s Ratings Services (S&P).

The Central Electricity Regulatory Commission released last month the final regulations that will determine tariffs for 2014-15 through to 2018-19. The norms are also applicable to generators such as NHPC, SJVN and PGCIL.

S&P expects NTPC’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) to decline 10-12 per cent and net income to fall under the new tariff structure. “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 fiscal 2015 compared with our expectation of about ₹18,000 crore in 2013-2014,” the agency said in a statement. “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 on these companies,” said Rajiv Vishwanathan, credit analyst at S&P.

“This is because the ratings on these companies incorporate some level of government support, in accordance with our methodology to assess government-related entities.”

PLF methodology The EBITDA of NTPC 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 rate it has been using so far. Second, incentives will now be based on plant load factor (PLF) from the earlier plant availability factor (PAF).

This means NTPC’s ability to earn incentives will depend on buyers’ demand and actual purchase of power, even though the company is compensated for fixed charges based on its PAF.

S&P said the revised norms are likely to have a smaller impact on NHPC and PowerGrid.

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