Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank facilities of South East U. P. Power Transmission Company Limited (SEUPPTCL).

 

The ratings factor in the partial commissioning of the company project: out of a total of 1,535 kilometres (km), 582 km under Group 1 (account for 38% of the total project length) has been successfully commissioned since 2017. Group 1 has been witnessing stable revenue and a proven track record of higher-than-normative level availability for the past four fiscals. The ratings also reflect the low offtake risks for Group 2, which forms ~62% of the total project, as per contractual terms of the transmission service agreement (TSA), post-project implementation, and expected benefits from stable cash flows as a transmission licensee.

 

The ratings are also driven by the strong execution and operational support expected from The Tata Power Co Ltd (Tata Power; rated 'CRISIL AA/Stable/CRISIL A1+') through its wholly owned subsidiary, Tata Power International Pte. Ltd (TPIPL), which is one of the shareholders of Resurgent Power Ventures Pte Ltd (Resurgent Power, new parent of the company); and expected financial flexibility due to the presence of strong sponsors of Resurgent Power (including Tata Power and ICICI Bank Pvt Ltd). Resurgent Power acquired the company under NCLT (National Company Law Tribunal) on September 16, 2022, at a total enterprise value of ~Rs 6,600 crore, of which Rs 3,251 crore was paid towards a one-time settlement against admitted claims of Rs 4,197 crore. The balance amount is allocated towards pending capital expenditure (capex) for completion of Group 2. Total deal is to be funded in a 75:25 debt-equity ratio.

 

These strengths are partially offset by exposure to significant project implementation risks for Group 2 given the early stage of construction; and moderate counterparty risk (exposure to Uttar Pradesh' distribution companies {discoms}) having comparatively weaker credit profile, though comfort is derived from track record of payments to transmission assets by the state discoms.

 

Some key requisite approvals are also awaited for Group 2, including forest clearances and ROW (right of way). Also, the pre-termination notice issued for Group 2 under the erstwhile management is yet to be formally withdrawn. However, CRISIL Ratings understands this is expected to happen in the coming months as it is a prerequisite to start the work for Group 2 and the same will be a key monitorable.

 

CRISIL Ratings also understands that the scope of Group 2 is under revision on account of significant delay in commissioning of the project under the erstwhile management, and this is expected to take a few months to finalise. Based on management discussions and as witnessed in other assets acquired by Resurgent Power under NCLT, CRISIL Ratings understands that the existing tariff structure for Group 2 is not likely to reduce as this was the key basis for biding under NCLT. Also, the original tariff was decided on tender-based competitive bidding (TBCB). However, clarity on the revised scope, along with final tariff for Group 2, will be key monitorable.

Analytical Approach

CRISIL Ratings has assessed the entity on a standalone basis.

Key Rating Drivers & Detailed Description

Strengths:

• Stable revenue for the already commissioned Group 1 and low offtake risks under contractual terms of the TSA for Group 2 after project implementation: 

SEUPPTCL has a TSA with UP Power Transmission Company Limited (UPPTCL) nominated by UP discoms under the TSA, wherein revenue is linked to availability of the transmission line with full recovery of revenue at a normative availability factor of 98%. Revenue is completely delinked from power demand-supply and volatility in the price of electricity. Moreover, factors affecting line availability, such as unchecked growth of vegetation, lightening, fog or high ambient temperature causing wear and tear of insulators and leading to flashovers do not involve significant costs and can be easily rectified, thereby minimising outage time. Furthermore, any outage due to cyclones or excessive lightning is usually attributable to an Act of God/grid unavailability and will not impact line availability. Group 1 of the project was commissioned in fiscal 2018 and has maintained above-normative line availability since 2019.

 

• Strong execution and operational support expected from Tata Power, and high financial flexibility due to the strength of new shareholders:

The company has been taken over by Resurgent Power, which is owned by Tata Power through its wholly owned subsidiary (26.0%), ICICI Bank (~10.0%) and various foreign sovereign funds (64.0%). In terms of board representation at SEUPPTCL, two of the three board members are from Tata Power.

 

SEUPPTCL is expected to benefit from the strong know-how of one of its sponsors, Tata Power, which has extensive experience in the power industry across the value chain. The operations and maintenance (O&M) of the company is expected to be managed by Tata Power, while EPC (engineering, procurement and construction) is likely to be undertaken by Tata Projects Ltd. Furthermore, the company is expected to enjoy financial flexibility due to the presence of strong sponsors of Resurgent Power (including Tata Power and ICICI Bank).

 

Weaknesses:

• Project implementation risk for Group 2:

Prior to the acquisition by Resurgent Power, SEUPPTCL was under stress on account of significant delays in project commissioning due to delayed approvals and the financial stress of the erstwhile promoters. Group I was commissioned in July 2017 against the revised scheduled commissioning date of December 2014. However, limited progress was made in Group 2, which got stalled in 2016. The company was finally admitted into NCLT in 2020.

 

Group 2 is currently exposed to implementation-related risks as it is only 35-40% complete as on the date of acquisition and is expected to take 22-24 months for completion. However, timely clarity on the final scope and revocation of existing pre-termination notice (issued by UPPTCL before NCLT) will be key monitorable. While some comfort is drawn from the fact that less than 1% of Group 2 is under forest area, project completion within the expected timelines will be contingent upon the project receiving all approvals (currently ~30% of approvals are pending, including forest and ROW clearances). While CRISIL Ratings derives comfort from the support that new promoters would provide to SEUPPTCL for execution and meeting any cost overruns in the project, completion of the Group 2 capex without any material time and cost overruns will be a key monitorable.

 

• Weak counterparty credit risk profile:

The entire revenue comes from the discoms of Uttar Pradesh, which have average credit risk profiles. Timely collection of dues is susceptible to the health of its counterparties, which can impact liquidity and debt servicing. Hence, SEUPPTCL faces higher counterparty risk than an inter-state transmission licensee where the counterparty risk is mitigated by the presence of a point-of-connection mechanism and strong collection efficiency. However, the risk is mitigated by presence of LC (letter of credit)-backed payment mechanism under TSA; relatively lower invoice amount than power generation companies that enable discoms to clear bills for transmission companies; and existence of intra-state pooling mechanism for the project. However, timely collection of dues shall remain a key monitorable.

 

• Exposure to modest O&M risks: 

Maintenance of high line availability is critical to the stability of revenue in the power transmission sector. Although the O&M expense forms a small portion of the revenue, improper line maintenance may lead to revenue loss and weaken loan repayment capability. However, these risks are mitigated by low technical complexity, routine nature of O&M activities and Tata Power’s experience in maintaining transmission lines.

Liquidity: Strong

Stable revenue and steady cash accrual from Group 1 should comfortably cover debt obligation over the medium term. Liquidity is also supported by debt service reserve account equivalent to debt obligation for three months and surplus cash of Rs 119 crore as on September 17, 2022. While the group 2 funding mix is expected to take care of the estimated cost for completing the project, any cost overrun for future capex is expected to be supported by the parent.

Outlook: Stable

The credit risk profile of SEUPPTCL will remain healthy over the medium term due to higher-than-normative line availability and timely collection under TSA for Group 1; along with expectation of achieving project closure for Group 2 on time without any significant cost overrun. In case of any cost overrun, support is likely from Resurgent Power.

Rating Sensitivity factors

Upward factors:

• Timely project completion without significant cost overrun without material reduction in existing tariff for Group 2, and
• Maintenance of line availability above 98% for Group 1
• Track record of timely receipts of payment from counterparties 

 

Downward factors:

• Line availability falling below 98% on a sustained basis for Group 1, thereby weakening cash flow
• Higher-than-expected receivables
• Substantial time or cost overrun for Group 2 capex, resulting in larger-than-expected debt

About the Company

Incorporated on September 11, 2009, SEUPPTCL was a wholly owned subsidiary of Mainpuri Power Transmission Pvt Ltd. The transmission project was originally awarded to Isolux Corsan S A (Spanish entity) in July 2011 under TBCB by UPPTCL. It has signed a TSA for 35 years from scheduled commercial operation date (SCOD) with four distribution companies in Uttar Pradesh to erect, commission and operate 765 kV S/C Mainpuri-Bara line with a 765kV/400kV substation in Mainpuri. The transmission network is around 1,535 km in length. The setting up of the five substations is split into two phases. The project has been undertaken to evacuate power from a few thermal power plants and improve the reliability and quality of supply. Group I is operational since July 2017. Revised SCOD for Group I and Group II were December 2014 and August 2015, respectively.

 

The company was subsequently acquired by Resurgent Power through a competitive bidding process under the Insolvency and Bankruptcy Code, 2016; the acquisition was completed on September 16, 2022.

About the parent

Resurgent Power is a joint venture based in Singapore. TPIPL (a wholly owned subsidiary of Tata Power) owns 26% stake in Resurgent Power, ICICI Bank owns 10%, and the balance 64% is held by other global investors

Key Financial Indicators of SEUPPTCL (CRISIL Ratings-adjusted)

As of period ended March 31	Unit	2022	2021
Revenue	Rs crore	469	456
Profit after tax (PAT)*	Rs crore	455	245
PAT margin	%	97.0	53.8
Adjusted debt/adjusted networth	Times	3.34	6.10
Interest coverage*	Times	-	2.28

*Interest cost was not charged to profit and loss account in FY 22

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned  with outlook
NA	Rupee Term Loan	NA	NA	Sep-42	1950	NA	CRISIL A-/Stable
NA	Working Capital Facility	NA	NA	NA	115	NA	CRISIL A-/Stable
NA	Bank Guarantee	NA	NA	NA	140	NA	CRISIL A2+