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June 12 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Power Grid Corporation of India Limited's (PGCIL) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. At the same time, the agency has affirmed PGCIL's senior unsecured rating of 'BBB-' and the 'BBB-' ratings on its USD500m senior unsecured notes.
KEY RATING DRIVERS
Constrained by Sovereign: PGCIL's IDR is a notch below its standalone credit profile of 'BBB', constrained by the 'BBB-' IDR of its 57.9% owner, the state of India. Fitch assesses PGCIL's linkages with the Indian state to be moderate to strong. The legal linkages are moderate with the government of India guaranteeing 20% - 30% of the total debt. The operational linkages are also moderate as the government provides operational support in issues related to right of way, forest clearances, land acquisitions, and collection of outstanding dues from state utilities. The strategic linkages are high as the company is the Central Transmission Utility, and is a key policy implementation tool in the electricity industry.
Dominant Interstate Transmission Provider: Power Grid's ratings benefit from its very strong market position with a near monopoly of India's interstate and inter-regional electricity transmission. India's transmission network is three tiered with the intra-state transmission networks being handled mainly by the state utilities. On an overall basis, PGCIL carries around 50% of the electricity in India.
Stable and Transparent Regulation: Around 95% of PGCIL's revenues are subject to transparent economic regulation. The ratings, therefore, benefit from regulatory certainty until March 2019, the latest five year regulatory period.
PGCIL's tariffs are determined by adding a return on equity- which has been maintained at 15.5% in the new tariff order. The tariff mechanism also allows full pass-through of all the fixed costs including actual interest charges so long as the company meets the regulatory availability of 98% for alternating current systems and 95% for high voltage direct current systems.. Power Grid has maintained its availability well over 99% over the years - in FY14, it was 99.92%.
Weak Counterparty Profile: PGCIL's counterparties - which are mainly state utilities - have weak financial profiles. However, PGCIL has managed to maintain a good receivable collection track-record with realisation levels of 98.9%, and very minimal receivables beyond the 60 day credit period granted to its customers. The company's good receivable position is due to the critical nature of its transmission assets as the dominant interstate transmission provider in India. In addition, transmission cost payments to PGCIL form only a small proportion of the state utility's total costs, with the largest payments going to generation companies.
Credit metrics under some pressure: Material investment requirements leading to sustained large negative free cash generation is exerting pressure on PGCIL's credit metrics. The capex budgeted for the next three years to FY14 (ending March) is around INR600bn. Net Leverage (net debt/EBITDA) increased to around 5.9x at FYE14 (EBITDA fixed charge cover of 2.6x) from 5.2x at FYE11. We expect net leverage to reduce to 5.3x through FY17, which leaves little headroom for PGCIL's stand-alone BBB credit profile. PGCIL, however, has a robust liquidity profile, with strong access to domestic and international capital markets. Fitch assesses that the INR53bn equity raised in FY14 and the ongoing cash flows from operations are adequate to manage the equity requirements for the company's capex programme.
Material Secured Indebtedness: PGCIL has substantial secured debt. Currently, around 92% of the total debt is secured against its tangible assets. As such, Fitch rates its senior secured debt one notch below its unconstrained rating of 'BBB'.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-An upgrade in India's rating to 'BBB'. This would result in an upgrade in the IDR, though the senior unsecured rating would remain unchanged
- PGCIL's stand-alone BBB credit profile can benefit from Net leverage falling below 4.5x, and fixed charge cover (EBITDA/fixed charges) rising over 3.5x, on a sustained basis accompanied by an improvement in its counterparty profile.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- A downgrade of India's ratings
- PGCIL's stand-alone credit profile, can be lowered if its Net leverage rises above 5.5x, and fixed charge cover falls below 2.5x, on a sustained basis; should this happen, PGCIL's senior-unsecured rating is also likely to be lowered given the material secured debt.