-- Power Grid 's strong market position and a
stable regulatory framework for power transmission in India
support the company's "satisfactory" business risk profile and
"significant" financial risk profile, in our opinion.
-- We believe there is an "extremely high" likelihood of
extraordinary government support for the India-based power
transmission company in the event of financial distress.
-- We are assigning our 'BBB-' long-term corporate credit
rating to Power Grid. We are also assigning our 'BBB-' issue
rating to the company's proposed unsecured notes.
-- The negative outlook reflects our negative outlook on the
sovereign credit rating on India and the company's sensitivity
to government intervention.
On Jan. 4, 2013, Standard & Poor's Ratings Services assigned
its 'BBB-' long-term corporate credit rating to power
transmission company Power Grid Corp. of India Ltd. The outlook
is negative. At the same time, we assigned our 'BBB-' issue
rating to the company's proposed issue of up to $1 billion
unsecured long-dated notes. The rating on the notes is subject
to our review of the final issuance documentation.
The rating on Power Grid reflects the company's near
monopoly inter-state transmission business in India and a stable
regulatory framework with a cost plus tariff mechanism on most
existing projects. We also believe there is an "extremely high"
likelihood of extraordinary support from the government of India
(unsolicited rating BBB-/Negative/A-3) to Power Grid in the
event of financial distress. The weak credit quality of the
company's customers and the country and macroeconomic risk
associated with India offset these strengths.
Power Grid's stand-alone credit profile of 'bbb-' reflects
the company's strong market position. We assess the company's
business risk profile as "satisfactory." Power Grid owns and
operates nearly 90% of the inter-state transmission network in
India. The company's network carries nearly 50% of the total
power generated in the country. We believe the company has
strong growth prospects despite its leading position due to
India's power deficit of about 10% of base demand and the
country's need to transmit power across regions. The company
also plays the important role of planning for nationwide
The regulatory environment for power transmission in India
is stable, in our opinion. The regulator has allowed
transmission companies to recover 14%-16% return on equity over
the past decade. The tariff also allows for cost recovery based
on system availability by Power Grid regardless of the amount of
power transmitted through its network. This facilitates stable
returns for the company, even if power demand declines, and
offers protection against volume risk.
Power Grid has maintained its system availability above 99%
over the past few years, and its collection record has been
reasonable despite the weak credit profiles of its
counterparties--the state electricity boards (SEBs).
Power Grid has a good project execution record. In our view,
the company is reasonably protected from the risk of "stranded"
assets (where transmission assets are functional but the
generation assets are not) due to India's power deficit and
billing that is based on the date of project commissioning.
A largely national presence exposes Power Grid to India's
country and macroeconomic risk. We believe political
considerations will continue to influence the ability and
willingness of SEBs to increase tariffs, limiting the
improvement in their weak credit profiles.
We assess Power Grid's financial risk profile as
"significant" despite its weaker financial ratios because: (1)
the company's returns are stable; (2) the nature of the business
is regulated with cost pass through; and (3) the cost plus norms
applicable to most of Power Grid's projects incentivize a
debt-to-capital structure of 70:30 because interest is
recoverable based on the actual cost.
We do not expect Power Grid's financial risk profile to
change materially over the next two to three years. We
anticipate that the company's aggressive capital expenditure
plans toward expansion will continue to result in significant
negative free operating cash flows. We estimate Power Grid will
maintain its ratio of funds from operation (FFO) to debt of
9%-10% and a debt-to-capital ratio of 70%-72% over the next two
to three years.
We expect Power Grid to continue to generate returns on
capital of 8%-9.5% despite competitive bidding and normative
(capital expenditure levels set by a regulator following a
planning and consultation process) recovery on capital
expenditure for projects awarded after 2011. Nevertheless, our
key rating considerations will be Power Grid's returns on these
projects once commissioned and its performance on projects where
recovery of tariff would be based on normative instead of actual
capital expenditure. We expect the company to manage most of its
new projects within the regulator's stipulated normative limits.
We view Power Grid as a government-related entity (GRE). In
accordance with our criteria for GREs, our view of an "extremely
high" likelihood of extraordinary government support in the
event of financial distress is based on our assessment of the
following Power Grid characteristics:
-- "Very strong" link with the government. We expect the
government to retain its majority shareholding (69.4%) in Power
Grid with administrative control by the Ministry of Power. The
government has also extended a sovereign guarantee on some of
the company's foreign currency loans from multilateral agencies.
-- "Critical" role for the government. Power Grid has a near
monopoly in the inter-state transmission network in India and a
central role in planning for the transmission network as the
central transmission utility. We believe the importance and
dependence of economic activities on Power Grid's transmission
services and its dominant position in a country with power
deficits determine its critical role.
We have equalized the rating on the proposed notes with the
corporate credit rating. This equalization reflects the absence
of a legal review by Standard & Poor's in India that would allow
it to form an opinion on the ability to differentiate between
secured and unsecured debt in the event of recovery.
Power Grid has "adequate" liquidity, as defined in our
criteria. The company's sources of liquidity are likely to cover
its needs by about 1.2x in the next 12 months. We expect the
company to meet its cash outflows, even if EBITDA declines by
15%. Our liquidity assessment incorporates the following
expectations and assumptions:
-- Sources in 2013 include cash and equivalent of over
Indian rupee (INR) 33 billion as of March 31, 2012 (including
cash that can be utilized only against specific projects), and
our projected FFO of over INR60 billion.
-- Power Grid borrowed an additional INR83 billion in the
six months ended Sept. 30, 2012, to fund its capital expenditure
needs. In addition, the company has tied up committed facilities
of about INR190 billion.
-- Power Grid has strong proven access to the domestic
capital market because of its status as one of India's largest
-- Uses of liquidity in 2013 include debt repayment of about
INR26 billion, cash dividends of about INR11 billion, and
estimated committed and non-discretionary capital expenditure of
over INR100 billion (assumed at 60% of total capital expenditure
for the year).
Power Grid's debt maturity profile is well spread out. We
expect the company to continue to have good access to
multilateral agencies from which it has raised funds in the
past. We believe Power Grid can access additional banking
facilities, if required, due to its stable financial profile and
GRE linkage. We expect the company to maintain a cushion on its
financial covenants, including a covenant to maintain the
debt-to-total capital ratio below 75%.
The negative outlook on Power Grid is consistent with the
sovereign credit rating outlook, and reflects Power Grid's
sensitivity to government intervention.
We could downgrade Power Grid if we lower the sovereign
credit rating or ongoing government support declines, and the
company's FFO-to-debt ratio falls sustainably below 9%-10%
possibly due to: (1) returns on capital becoming volatile
because of normative capital expenditure recovery, a change in
tariff, or competitive bidding; or (2) the company's operating
efficiency suffering because of a significant delay in project
commissioning or lagged payments from weak counterparties.
We could revise the outlook to stable if we revise the
sovereign rating outlook to stable and Power Grid's stand-alone
credit profile is unchanged.
Related Criteria And Research
-- Methodology: Management And Governance Credit Factors For
Corporate Entities And Insurers, Nov. 13, 2012
-- Rating Government-Related Entities: Methodology And
Assumptions, Dec. 9, 2010
-- 2008 Corporate Criteria: Analytical Methodology, April
Power Grid Corp. of India Ltd.
Corporate Credit Rating BBB-/Negative/--
Senior Unsecured BBB-