The ratings are supported by the presence of an experienced sponsor and power
transmission engineering, procurement and construction contractor KEC
International Limited (KEC), an undertaking provided by KEC to fund cost
overruns during the construction stage, and the availability-based unitary
charges. However, the ratings are constrained by construction and counterparty
Incorporated in September 2015, KEC-BSTPL has signed a transmission service agreement with Rajasthan Rajya Vidyut Prasaran Nigam Limited (RRVPN, the state transmission utility) to implement a 400kV transmission line project (172km) on a design, build, finance, operate and transfer basis. The transmission line will connect Bikaner substation of RRVPN to the Sikar substation of the Power Grid Corporation India Limited. KEC-BSTPL is a wholly-owned subsidiary of KEC. The transmission line will evacuate power from a few thermal plants and wind farms in the region and improve the reliability and quality of power supply. The project was awarded to KEC-BSTPL as it quoted the lowest viability gap funding (VGF) requirement based on a base unitary (transmission) charge of INR294.3m/year declared for the project. The estimated project cost of INR2,443m will be funded by debt, equity and VGF in the ratio of 70:18.2:11.8. The quoted VGF of INR294.3m will be received by the company in proportion to project progress.
KEY RATING DRIVERS
Predictable Revenue Stream: The rating is supported by pre-determined unitary charge payments from RRVPN for 25 years. Unitary charge for the first financial year after commissioning is fixed at INR294.3m/year. For the subsequent years, unitary charge will be reduced by 1% yoy. Unitary charge will also be indexed to capture 30% of variation in the price index, which may partially address escalation in operation and maintenance charges. The entire transmission tariff for a particular year can be claimed on maintaining a normative availability of at least 98%.
Experienced Contractor Mitigates Completion Risk: KEC-BSTPL has a fixed-time, fixed price engineering, procurement and construction contract with KEC, which is also the project sponsor. However, right of way concerns cannot be eliminated at the present stage of the project.
Strong Project Sponsor: KEC is a reasonably strong sponsor, having seven decades of record in constructing power transmission projects. Ind-Ra expects the project to benefit largely from the operational, management and financial support from KEC. Besides the committed equity for the project, KEC has committed to meet cost overrun and to compensate for any shortfall or delay in realisation of VGF. According to the management, 52.52% of the project equity has been infused by March 2016.
Minimal Operational Risk: Ind-Ra considers that operating risks are low for transmission projects, given that these projects generally achieve 98% availability. According to the company, operation and maintenance is likely to be carried out by a specialised agency and the contract would be awarded nearer to commissioning. Equipment and technology employed in the project is widely utilised in transmission lines in India.
Debt Structure: The project’s debt structure offers protection to senior lenders including a security package, with financial lock-up triggers (total long-term debt to equity mix of 80:20, debt service coverage ratio of 1.10x), water fall mechanism prioritising debt service and other standard default covenants. Ind-Ra believes that the debt service reserve equivalent to three month’s debt service is adequate to tide over short-term stress scenarios. 64% of debt is amortising in structured quarterly repayments and balance is due as a bullet repayment on 30 March 2031. The presence of a 10-year tail period for the debt provides significant comfort regarding refinancing of the bullet repayment. Ind-Ra’s analysis indicates comfortable debt service coverage ratios during the operations even in stress cases.
Counterparty Risks: Counterparty payment behaviour would determine future rating movements. Ind-Ra takes comfort from multiple payment security mechanisms in the project structure including a default escrow account, deed of hypothecation on revenue of RRVPN covering maximum monthly unitary charge in a year, and an unconditional, revolving and irrevocable letter of credit for a minimum monthly unitary charge in a year.
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