Singapore, October 08, 2018 -- Moody's Investors Service ("Moody's") has assigned
a Baa2 issuer rating to Power Grid Corporation of India Limited (Power
Grid).
The outlook on the rating is stable.
RATINGS RATIONALE
"Power Grid's Baa2 rating reflects its baseline credit assessment
(BCA) of baa2. The rating does not factor in any uplift from the
government due to the high baa2 BCA relative to the Baa2 sovereign rating,"
says Abhishek Tyagi, a Moody's Vice President and Senior Analyst.
Moody's however considers that Power Grid will receive a very high
likelihood of support from the Indian government in case of need,
particularly in light of the strategic nature of Power Grid's assets
to the transmission of power in India, as well as the government's
56.27% ownership of Power Grid.
"Power Grid's standalone credit strength reflects its strong
competitive position, favorable regulatory environment for electricity
transmission in India, strong financial profile, cost-plus
tariff structure and payment support system which mitigates debtors'
payment defaults," Tyagi adds.
"Power Grid's rating also incorporates the implementation
risk associated with the company's capex program over the next few
years," adds Tyagi.
Power Grid is the largest transmission company in India and has long track
record of development of transmission projects. Power Grid transmits
about 45%-50% of the total power generated in India
on its transmission network. It also owns and operates around 85%
of India's inter-state transmission system (ISTS).
Power Grid's regulated transmission business contributes more than
90% of its revenue and EBITDA and provides visibility to its revenues
and cashflow. Currently, the regulated transmission revenues
are based on tariff formula which allows all costs to be passed through
in the tariff and earn a 15.5% regulated return on invested
equity. The tariff formula and the operating norms are reset every
five years by the regulator. We expect a similar tariff structure
for Power Grid in the next control period which starts in April 2019.
Power Grid's credit profile also benefits from its track record
of performing better than the regulatory operational benchmarks for availability.
We expect the share of competitively bid transmission projects -
where there are no guaranteed returns -- to remain less than 5%
in the medium term. We also expect the share of joint --venture
projects where Power Grid typically owns less than a 50% stake
to be limited in terms of revenue and debt contribution over the medium
term. The share of telecom and consulting business -- which
are unregulated -- remains marginal and we do not expect it to materially
impact the credit profile of Power Grid.
Moody's expects Power Grid to have interest coverage as measured
by (FFO + interest) / interest to range from 2.8x-3.2x
level and its financial leverage as measured by FFO / debt to be in the
range of 11%- 15% over next 12-24 months which
will continue to support its BCA. These levels, which incorporate
Power Grid's active capital expenditure program, are manageable
within the rating.
Power Grid is a beneficiary of ongoing support from the Government of
India. Despite the weak finances of state-owned distribution
companies, Power Grid has enjoyed a good track record of receipt
of payments from distribution companies over the last 15 years since the
establishment of Payment Security Mechanism. The Payment Security
Mechanism is based on tripartite agreements between central government,
state governments and the Reserve Bank of India, and these agreements
ensure payments to Power Grid in the event of default by state owned distribution
companies.
The Government also guarantees around 19% of Power Grid's
debt which further establishes strong support for Power Grid.
Under the Moody's Joint Default Analysis (JDA) approach for government-related
issuers (GRIs), our assessment of the likelihood of government support
for the company is "Very High" and is manifested through several considerations.
Specifically, the government has 56.27% ownership
at 30 June 2018 and therefore closely directs the activities of Power
Grid. The government also has a strong track record of support,
as shown by its previous actions that include: (1) one time settlement
scheme in 2003 which led to settlement of all past dues of state-owned
distribution companies (2) and extending guarantees for around 19%
of Power Grid's debt (at 31 March 2018)
Our assessment for dependence between the Government and Power Grid under
the JDA approach is also "Very High". This is mainly
driven by the close financial and operating linkages between the two including
a common revenue base with the vast majority of Power Grid's revenues
coming from Government owned domestic based state distribution entities
and similar exposure that both have to the domestic economy and common
credit risks.
Power Grid's issuer rating is not currently notched down for legal
subordination despite the presence of material secured debt in the capital
structure. Such subordination is mitigated by the unique national
and strategic importance of Power Grid and, consequently,
the potential support from the government of India in a hypothetical financially
distressed situation, thereby improving the position of unsecured
creditors relative to secured creditors. Legal subordination is
also partially mitigated by the preponderance of assets that provide sufficient
coverage for senior unsecured creditors after the claims of secured creditors
are satisfied.
The stable rating outlook reflects our expectation that Power Grid will
continue to generate highly predictable cash flows for its regulated business,
will maintain its sound liquidity profile and the share of unregulated
business will remain marginal.
Upward pressure on the rating is unlikely over the next 12-18 months,
based on the company's predictable business profile and financial
strategy as well as our expectation of a continued stable and supportive
regulatory environment in India.
The BCA of Power Grid could come under pressure if FFO / debt declines
below 8% on a consistent basis. Having said that,
Power Grid's rating is resilient to a deterioration in the BCA as
we expect "Very High" likelihood of support from the Government
of India which would provide support to its ratings.
On the other hand, a rating downgrade could result if the government
reduces its stake in Power Grid to below 50% or evidence emerges
of a weakening in government support. The BCA could also be pressured
or downgraded in the event that the current supportive regulatory environment
in India for the company weakens or in the event that Power Grid's
tariff structure deteriorates.
In addition, should the Government of India (Baa2 stable) be downgraded,
Power Grid's ratings are also likely to be downgraded.
The methodologies used in these rating were Regulated Electric and Gas
Networks published in March 2017, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Power Grid Corporation of India Limited (Power Grid), is an Indian
state-owned electric utility company which was incorporated in
1989. Power Grid transmits about 50% of the total power
generated in India on its transmission network. It also owns and
operates around 85% of India's inter-state transmission
system (ISTS).
As of June 2018, Power Grid owns around 148,659 circuit kilometers
(ckm) transmission lines; 236 numbers of substations with an aggregate
transformation capacity of 339,933MVA.
At end-June 2018, the Indian government owned around 56.27%
of Power Grid. Life Insurance Corporation of India, the other
major shareholder, owned 6.38%. Institutional
investors and the public held the remaining shares.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Abhishek Tyagi
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
