Rationale

 The reaffirmation of the rating factors in the strong sponsor profile of Neyveli Uttar Pradesh Power Limited (NUPPL) — a joint venture (JV) between NLC India Limited {NLCIL; rated [ICRA]AAA (Stable)} and Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited (UPRVUNL), which is Uttar Pradesh’s (UP) state-owned power generation company (genco). The rating considers the low permit risks for the project, as the required approvals and land are in place. Auxiliary infrastructure like transmission lines, water intake system and one portion of the railway siding has also been completed. The power purchase agreements (PPA) for the entire plant capacity are tied up with Uttar Pradesh Power Corporation Limited (UPPCL; 75%) and Assam Power Distribution Company Limited (APDCL; 25%) based on the cost-plus tariff principles, which will safeguard the profitability against fuel price volatility and provide for regulated returns, subject to achieving normative operating efficiency and receiving the approval of capital cost by the regulator. In addition, the company has tied up the initially budgeted debt funding and the JV partners are infusing equity as per their shareholding and based on the progress of the project. ICRA also takes note of the extension in the project debt moratorium to January 2026 from July 2024 by the lenders. The rating is, however constrained by the implementation risks associated with the under-construction status, with the project witnessing delays in execution and cost escalation. The commissioning timeline (CoD) for Unit-1 has been extended to July 2024 from December 2023 expected during the last rating exercise, owing to issues with the balance of plant (BoP) contractor. The other units are expected to be completed subsequently in November 2024 and March 2025. This is against the lender’s scheduled CoD of January 2025. The company has incurred over 78% of the revised budgeted project cost as of May 2024. The delay in execution along with the increase in certain equipment costs and addition of the flue-gas desulphurisation (FGD) plant has resulted in cost overruns for the project. The rating is also constrained by the risk associated with tying up additional debt as the project cost has been further revised to Rs. 21,780.94 crore from Rs. 19,406.12 crore, which was earlier revised from Rs. 17,237.80 crore. Herein, comfort is drawn from the presence of a strong sponsor, NLCIL, having superior financial flexibility. The company’s ability to complete the project without further delays and fund the cost escalations in a timely manner would be the key monitorable. This apart, the company has to tie up funding for the captive mine, wherein a capital investment of Rs. 2,242.90 crore is required. Further, the rating considers the counterparty risks arising from the modest financial profiles of the distribution utilities (discoms), especially UP discoms, post commissioning. While the project’s fuel supply risks are expected to be low as a captive coal block has been allotted for the company’s coal requirements, the risk of delays in the commencement of mining operations in the allocated Pachwara south coal block remains. As a result, the company has requested for bridge coal linkage from the Northern Coalfields Limited (NCL), wherein partial approval has been received. Alternatively, the company plans to procure coal from NLCIL’s captive coal mine at Talabira, Odisha, in case of any shortfall.