(The following was released by the rating agency)
MUMBAI/SINGAPORE, January 04 (Fitch) Fitch Ratings has published India-based Power Grid Corporation of India Ltd's (PGCIL) 'BBB-' Issuer Default Rating (IDR). The Outlook is Negative. Simultaneously, the agency has published PGCIL's 'BBB-' senior unsecured rating and assigned an expected 'BBB-(EXP)' rating to its proposed bond.
The final rating on the bond is contingent on the receipt of information conforming to the documentation already received.
PGCIL is rated a notch below its standalone credit profile of 'BBB', due to constraint by the 'BBB-' IDR of its 69.4% owner, the state of India, which is on Negative Outlook. The Indian government, which has control over management and the appointment of the board, can influence PGCIL's financial and operating decisions. Fitch assesses the legal linkages between the two entities as moderate as the Indian government guarantees only 20%-30% of PGCIL's total debt.
PGCIL is strategically important to the Indian government given its dominant position in India's electricity transmission sector. The company accounts for more than 90% of India's inter-state and inter-regional transmission systems and over 50% of the electricity transmitted in India. The company benefits from a stable and transparent regulatory system. The regulator, the Central Electricity Regulatory Commission, is consultative in its draft regulations. The well-established tariff mechanism provides cash flow predictability by allowing for a return on equity and has cost pass-through measures.
Tariffs are linked to PGCIL's transmission network availability and are not dependent on the actual power transmitted. PGCIL has maintained the system availability well above mandated levels. In the financial year ended March 2012, PGCIL's system availability was 99.94% against the regulatory benchmark of 98%. Despite the grid failure in the Northern, Eastern, and North Eastern Grids in July 2012, the availability for H1 FY13 was 99.92%.
The stand-alone credit profile is constrained by the company's weak counterparty profile and its high levels of debt as a proportion of net fixed assets. Key counterparties are state electricity board (SEB) distribution companies which have weak financial profiles due to heavy accumulated losses. However, PGCIL has managed to maintain receivables at healthy levels. Distribution companies prioritise payments to PGCIL due to the company's dominance in India's electricity transmission, and also because transmission cost payments are small compared with SEBs' payments to generation companies.
The company has capital expenditure of around INR1,000bn planned for the next five years, which will largely be debt-funded. This is likely to increase debt as a share of net fixed assets to above 70% from 67% at FYE12. As a result PGCIL's credit metrics are unlikely to improve materially over the short- to medium-term. Its leverage, as measured by adjusted debt net of cash to fund flow from operations (FFO), was around 6x at FYE12.
PGCIL has substantial secured debt. Currently, around 95% of the total debt is secured against its tangible assets. As such, Fitch has rated its senior secured debt at 'BBB-', one notch below its unconstrained rating of 'BBB'.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A downgrade of India's ratings
- FFO net leverage rising above 6x, and FFO fixed charge cover falling below 2.5x (FY12: 2.9x), on a sustained basis, can lead to a downgrade of the standalone rating
Positive: Future developments that may, individually or collectively, lead to a 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
- FFO net adjusted leverage falling below 5x, and FFO fixed charge cover rising over 3.5x, on a sustained basis, can lead to an upgrade of the standalone rating.