By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed Western U.P. Power Transmission Company Limited’s (WUPPTCL) INR37,717.2 million rupee term loan’s ratings as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Rupee term loan

-

13%

 September 2029

INR37,717.2

IND BBB/Stable

Affirmed

KEY RATING DRIVERS

Predictable Revenue Stream: Project revenue is fully derived from predetermined tariff payments from four Uttar Pradesh state distribution companies (discoms) for 35 years. Charges are payable based on the availability of the project network. Modalities for payment have been finalised by the discoms and the payments of the bills of Lot-1 would commence shortly. However, the project is exposed to the weak financial profile of the discoms. Counterparty payment behaviour would determine future rating movements. While the counterparty is weak, Ind-Ra takes comfort from the transmission lines being a natural monopoly unlike generation assets that could help the discoms prioritise payments to the project company. Also, a revolving letter of credit equivalent to around one month of billing will be available from the discoms for any delays in payment. Transmission charges are fixed and tied to availability, eliminating price-related risks. Low operating risk of transmission assets mitigates volume-related risks.

Experienced Contractor Mitigates Completion Risk: Ind-Ra takes comfort from WUPPTCL’s fixed-time, fixed-price engineering, procurement and construction contract with Megha Engineering and Infrastructures Limited (MEIL, ‘IND A+’/Stable), which is the project sponsor. Also, any delay due to external disturbances would fall under force majeure.

Strong Project Sponsor: MEIL is a reasonably strong project sponsor and has over 10 years of track record in construction in the infrastructure sector. Ind-Ra expects the project to benefit largely from strong operational, management and financial support from MEIL. Besides the committed equity of the project cost, the sponsors have committed to meet cost overruns. According to the management, 53% of the project equity has been infused by September 2016; however, an amount equivalent to INR26,421.4 million (67% of the total work done) is outstanding as creditors to the EPC contractor (MEIL) and others The management states that there would not be any interest cost to the project company on a delay in payment to the creditor.

Minimal Operational Risk: The operation of the transmission lines is likely to be carried out by an in-house team or MEIL. Although MEIL has construction experience in the transmission sector, this is the first transmission line project it will operate. However, equipment and technology employed in the project are widely utilised in transmission lines across India. Once operational, the transmission lines would benefit from a low operational risk.

Residual Construction Risk: Ind-Ra believes that there are chances of a further delay in Lot-3, given pending minor right of way issues and lag in equipment delivery. However, the management states that commissioning is likely for the entire project by March 2017. According to lenders independent engineer (LIE) report, Lot-1 is 99.63% complete, followed by Lot-2 (92.3%) and Lot-3 (86.42%). The company has already missed the revised commercial operations date of August 2016. Lot-1 was commissioned on 17 March 2016. The management indicates that Lot-2 and Lot-3 would be commissioned by 31 March 2017. Approval from Uttar Pradesh Electricity Regulatory Commission for the commissioning of all Lots by March 2017 is pending.

Comfortable Debt Structure: WUPPTCL benefits from a fully amortising, long tenor debt with a repayment profile of 48 quarters. The structure includes the creation of a three-month debt service reserve within six months from the commercial operations date. Moreover, the project has a long tail of 23 years.

Coverages Low but Consistent with Availability-Based Assets:
Debt service coverage ratio (DSCR) is thin, but comparable with availability-based assets. Ind-Ra’s base case projected DSCR is 1.03x minimum and 1.14x average. Under a scenario of increased operation and maintenance costs (10% higher than base case) and lower availability (96% as against the base case assumption of 98%), Ind-Ra’s rating case projected DSCR is 0.84x minimum and 1.06x average. According to the supplementary loan agreement, amortisation was scheduled to commence in March 2017; however, the company is negotiating an amendment to the loan agreement. According to the management, the amortisation is expected to commence in December 2017. The agency has factored in the proposed amortisation schedule in its base case. The same will be amended in the loan agreement once a supplementary agreement is signed with the discoms.


RATING SENSITIVITIES

Positive: A rating upgrade could result once WUPPTCL start receiving tariff payments from the discoms.

Negative:
Prolonged delays in construction and receipt of transmission charges from WUPPTCL, substantially higher-than-expected operating expenses and/or absent sponsor support may lead to a rating downgrade.


COMPANY PROFILE

WUPPTCL has signed a transmission service agreement with four Uttar Pradesh-based discoms to erect, commission and operate seven substations and 12 transmission lines of different voltages 765/400/220/132/33kV in the western part of the state. The transmission network is about 819 circuit km with seven substations. WUPPTCL is owned by MEIL and Cobra Instalaciones Y Servicios SA (Cobra) through its subsidiary Gomti Power Infra Pvt Ltd. The project is undertaken to evacuate the power to be generated from new thermal power plants and improve the reliability and quality of supply.

The project cost is INR50,289.6 million and is being funded by the sponsor’s contribution of INR12,572.4 million and a term loan of INR37,717.2 million.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (million)

Rating

22 January 2016

Rupee term loan

Long-term

INR37,717.2

IND BBB/Stable

IND BBB/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

Project finance loans are instruments with moderate complexity levels, where the relationship between the inherent risk factors and intrinsic return characteristics is less straightforward given the presence of certain contingency features. Special purpose vehicle structure is backed by a single asset.

For more information, visit
www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Ratnam Raju Nakka

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001742

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121