| Essar Power Transmission Company Limited | ||||
| Rating revised to 'Watch with Developing Implications' | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its rating watch on the long-term bank facilities and optionally convertible debentures of Essar Power Transmission Company Limited (EPTCL) to 'Rating Watch with Developing Implications' from 'Rating Watch with Negative Implications'.
The rating was placed on ‘Watch Negative’ on February 14, 2023, due to weakened liquidity following low collections from counterparties - the central transmission utility (CTU) and Mahan Energy Ltd (MEL) - since April 2022.
The rating watch has now been revised to ‘Watch Developing’ as payments from the counterparties have largely normalised since February 2023 and liquidity has improved. Cash and equivalents (including three months of debt service reserve account [DSRA]) rose to Rs 135 crore as on June 21, 2023, from Rs 95 crore on March 9, 2023.
Post the receipt of the Appellate Tribunal For Electricity (APTEL) order dated January 24, 2023, the EPTCL management has indicated that the CTU has not been deducting any past dues and MEL has started making regular payments to the CTU which are being passed on to EPTCL. Collections remained weak in April 2023, at 33%, but improved to 67% in May 2023 and are expected around 86% for June based on collections till June 20, 2023. The final decision on the appeal by MEL for recovery of 24% of Stage II tariff is pending and the CTU has withheld around Rs 266 crore for fiscal 2023. EPTCL, however, received Rs 86 crore in March 2023 from MEL in lieu of dues between November 2021 and December 2022.
CRISIL Ratings will continue to monitor the collection efficiency and restoration of DSRA to six months of debt obligation. Recovery of past dues held back by the CTU is also a key monitorable.
While CRISIL Ratings continues to consider the standalone business and financial risk profiles of EPTCL, the Essar group has articulated that it will provide timely financial support to EPTCL to avoid any delay in debt servicing if there is any further delay in collections or deduction by the CTU.
In June 2022, Adani Transmission Ltd signed a definitive share purchase agreement to take over 100% of EPTCL shares. The deal is subject to approval by regulatory authorities and lenders.
The rating continues to reflect the expected stability in EPTCL’s revenue over the medium term, backed by its healthy track record of maintaining line availability well above 98%; assured sales under the transmission service agreement (TSA); and timely collection of receivables under the PoC (point of connection) pool mechanism. These strengths are partially offset by the risks related to the restructuring of the power business of the promoter group and exposure to operations and maintenance (O&M) risk. |
Analytical Approach CRISIL Ratings has evaluated the standalone business and financial risk profiles of EPTCL and has not combined other assets of the Essar group as the company is ring-fenced from the group. The cash inflow is collected in a trust and retention account with a payment waterfall mechanism. The promoter can withdraw 50% of the surplus from the project only after meeting the payment conditions set by lenders, such as maintenance of a DSRA equivalent to six months of interest and principal obligations. |
Key Rating Drivers & Detailed Description Strengths: Expected stable revenue amid availability-based tariff and assured sales under TSA EPTCL signed a 25-year TSA in June 2013 with the Power Grid Corporation of India Ltd (PGCIL; ‘CRISIL AAA/Stable/CRISIL A1+’). As per the terms, revenue (transmission charge) is linked to availability of the transmission line (full recovery of revenue will be at a normative availability factor of 98%), and is completely delinked from the power demand-supply situation and volatility in electricity prices. Moreover, factors affecting line availability (such as unchecked vegetation growth, lightning or high ambient temperature causing wear and tear of insulators leading to flashovers) are routine, do not involve significant cost and are easily rectifiable, thereby minimising outage time.
Furthermore, any outage because of extreme weather conditions, cyclones or excessive lightning is usually classified as an act of God, which does not impact line availability and is covered under the force majeure clause of the TSA. EPTCL has maintained above-normative line availability since commissioning, in line with the industry standard. Given the stable nature of the transmission business and its operating track record, the company is likely to maintain line availability of more than 98% over the medium term.
Cash flow stability under the PoC mechanism for large part of tariff Under the PoC mechanism, the CTU collects monthly transmission charges on behalf of all the inter-state transmission system (ISTS) licensees from the designated ISTS customers. All ISTS licensees are then paid their share of transmission charges from the centrally collected pool. This method ensures that any risk of default or delay by a designated customer is shared by all ISTS licensees in proportion to their share in the centrally collected pool. The final tariff order for Stage II has mitigated the regulatory risk for EPTCL and provided stability to revenue. However, 24% of the tariff for Stage II needs to be billed directly to MEL, and is hence out of the ambit of the PoC mechanism, resulting in counterparty risk to that extent. However, over 80% of the EPTCL tariff (including Stage I and 76% of Stage II) will benefit from the strong collection efficiency of the CTU and diversification of the counterparty risk profile under the PoC pool mechanism.
Weaknesses: Restructuring of the power business of the promoter group EPTCL is held by Essar Power Ltd (EPOL), which also holds the coal and gas-based power generating assets of the Essar group. Two of these assets have been restructured because of financial stress in the entities. While the cash flow of EPTCL is ring-fenced from the group, the restructuring has reduced overall financial flexibility. Any incremental exposure to the group will be a key rating sensitivity factor.
Exposure to O&M risk Maintenance of high line availability is critical to ensuring stability of revenue in the power transmission sector. Although O&M expenses form a small portion of the revenue, improper line maintenance may lead to losses and weaken loan repayment capability. However, these risks are mitigated by low technical complexity and O&M activity being routine, as well as the appointment of an O&M contractor. |
Liquidity: Adequate Weak cash inflow in fiscal 2023 had severely depleted liquidity to Rs 28 crore as on January 31, 2023, from over Rs 200 crore as of March 2022. However, following the APTEL order, payments from MEL and the CTU have improved liquidity to Rs 135 crore as on June 21, 2023, which cover debt obligations for around six months. Debt obligation entails monthly interest payment of Rs 12-13 crore and quarterly principal repayment of Rs 27 crore. Cash and bank balances, including DSRA, are sufficient to meet the debt obligation |
Rating Sensitivity Factors Upward Factors
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About the Company Incorporated in 2004, EPTCL is a wholly owned subsidiary of EPOL. EPTCL was awarded the ISTS licence by the Central Electricity Regulatory Commission through an order dated April 10, 2008, to develop a transmission system and the associated infrastructure in the Gandhar-Hazira and Mahan-Sipat sections.
The company signed a TSA with PGCIL on June 20, 2013. The project, which was won on a cost-plus basis, was constructed in two stages. Stage I includes a 105-circuit kilometre (ckm) transmission line along with one substation in Gujarat and was commissioned in April 2013. Stage II includes a 336.7-ckm transmission line across Madhya Pradesh and Chhattisgarh, with seven bays at the Mahan switchyard and two in Bilaspur, Chhattisgarh. It was commissioned in September 2018. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
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Criteria Details
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