Detailed Rationale

CRISIL Ratings has assigned its 'Provisional CRISIL A+ (CE)/Stable rating to the proposed Rs. 8,000 crore bond issuance programme of  U. P. Power Corporation Limited (UPPCL). CRISIL Ratings has also reaffirmed its 'CRISIL A+(CE)/Stable' rating on the bonds of UPPCL. The rating on the bonds of Rs 1,175.2 crore has been withdrawn (see Annexure: Details of rating withdrawn) on confirmation from the debenture trustee that these bonds have been fully redeemed. The rating withdrawal is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings continue to reflect the strength of unconditional and irrevocable guarantee provided by the Government of Uttar Pradesh (GoUP), trustee-administered escrow and payment mechanism for the bonds and presence of adequate liquidity of two quarters in the form of debt service reserve account (DSRA). The company is adhering to a defined T structure wherein electricity receivables are escrowed into a bond-servicing account on daily basis so as to adequately fund the account by T-15 days (wherein T is the due date) prior to the entire debt servicing requirement for that quarter.

 

The rating assigned for the proposed bond issuance also factors in the strength of an unconditional and irrevocable guarantee provided by the GoUP, expected state budgetary allocation covering entire debt servicing requirement, trustee-administered escrow and payment mechanism for the bonds and expected liquidity of 2 quarters in the form of debt service reserve account (DSRA). The company is expected to adhere to a defined T structure where electricity receivables are escrowed into a bond-servicing account on daily basis so as to adequately fund the account by T-15 days (where T is the due date) prior to the entire debt servicing requirement for that quarter. In case of any cashflow mismatch, additional revenue stream can also be trapped.

 

The ratings also reflect GoUP's high dependence on the centre for revenue along with healthy own-tax buoyancy, leading to large revenue surplus since fiscal 2007 with fiscal 2021 being an exception. These strengths are partially offset by the weak socio-economic parameters of the state, and high indebtedness with weak performance of state electricity distribution companies (discoms) leading to higher dependence on the state for support in the form of guarantees and subsidies.

Analytical Approach

For arriving at its rating, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. In addition to the state guarantee, the payment mechanism provides for an enhanced liquidity cushion through a DSRA and a subsidy/budgetary allocation-trapping mechanism in case the DSRA is utilised. This liquidity buffer mitigates the risk of delayed payment, if any, from the state government, thereby lowering the risk for the instrument.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Presence of unconditional and irrevocable guarantee provided by GoUP, trustee-administered escrow and payment mechanism, and adequate liquidity

The existing bond issue benefits from the credit enhancement provided by a well-defined T-structured guarantee trigger mechanism, an adequate liquidity buffer, and a mechanism to trap the subsidy receipts to replenish the DSRA if it is utilised.

 

The primary cash flow to be harnessed for bond servicing will come via escrow of electricity receivables of around Rs 20 crore per day to a bond servicing account. In this account, fixed deposits will be maintained on daily basis in such a manner that the entire servicing required in a quarter is collected by T-15 days. Any excess amount will be transferred back to the revenue account of the company, thereby providing adequate cover. In the event of a shortfall in primary cash flow, the structure will be backed by a legal recourse to the state government via a trustee-monitored guarantee invocation framework. Furthermore, a two-quarter DSRA provides liquidity cushion, which lowers the risk of any delay in receipt of payment from the state government. If the DSRA is utilised, the structure provides for trapping of subsidy receipts (more than Rs 11,500 crore allocated for fiscal 2022) that are a steady budgeted monthly inflow from the state and would first be used to top up the DSRA, well before the next payment cycle. The additional liquidity buffer enhances the strength of the payment structure and provides adequate protection from administrative delays.

 

However, utilisation of the DSRA, lack of prompt receipt of funds from the state government, or non-compliance with the timelines of the T-structure by the trustee would continue to be key rating sensitivity factors.

 

Proposed bond issuance to also have similar structure with additional cushion of budgetary allocation from the state government covering entire debt servicing requirements

The proposed bond issuance of Rs 8,000 crore will also involve daily escrow of electricity receivables of around Rs 9 crore per day to a bond-servicing account. It will be further supported by fund infusion from GoUP on a quarterly basis through budgetary allocation. The funds shall be infused between T-45 to T-15 days to fully meet the debt servicing obligations due on date T. Post receipt of funds from the state, any surplus amount in the bond servicing account shall be available to UPPCL for corporate purpose. In addition to this, collections from irrigation and agriculture departments (if required from other customers as well) up to Rs 600 crore can be trapped on quarterly basis in case of delay in receipt of funds from the state or insufficient collections through escrow mechanism. The proposed bond issuance shall have a two-quarter DSRA which provides liquidity cushion.

Large economy base and healthy own-tax buoyancy

Uttar Pradesh is the third-largest Indian state in terms of gross state domestic product (GSDP) with consistent revenue surpluses, benefitting from the high share in central tax devolutions (CTD) and healthy own-tax revenue. Because of the large population base, the state gets the largest share of tax devolutions at 17.9% as recommended by the 15th Finance Commission; a marginal decrease from the earlier share of 17.96% (recommended by the 14th Finance Commission) and remains a key driver contributing to 30-35% of the overall revenue receipts.

Uttar Pradesh has had revenue surpluses since fiscal 2007 due to large inflow of CTD with an exception in fiscal 2021 when revenue is estimated to be in deficit due to substantial reduction in CTD. For fiscal 2021, based on CAG estimates, the state is expected to have a revenue deficit of Rs ~13,000 crore, though revenue surplus is expected from fiscal 2022 onwards due to recovery in tax collections. Tax buoyancy in the state continues to be healthy with own-tax revenue being 6.5-7.5% of the GSDP.

Weaknesses

Weak socio-economic parameters

Uttar Pradesh has weak demographic and socio-economic positioning with low per capita income compared with other states. The contribution from the secondary sector has been declining, with high dependence on the primary sector. The state also has fourth-highest population density and low literacy and urbanisation rates. The weak social indices will necessitate considerable outlays for eventual convergence to the national average level over a longer term.

 

High indebtedness with moderate economic management

Total debt plus guarantee to GSDP has risen close to 48% in fiscal 2021 (CAG) from 42.8% in the previous fiscal. The increase was mainly due to higher borrowing to fund revenue deficits and capital outlays and also increase in guarantees by around Rs 28,000 crore under the Atmanirbhar package sanctioned for UPPCL. The gross fiscal deficit to GSDP remained high at 3.8% in fiscal 2021 (CAG) against 2.74% in fiscal 2020. There has been no utilisation of ways and means by the state.

 

Below-average operational performance of UPPCL

The state’s power reforms have lagged as discoms have not met both the operational and financial targets laid under UDAY (Ujwal Discom Assurance Yojana). The AT&C (aggregate technical and commercial) loss remained high at 31.3% and 27.2% in the first half of fiscal 2022 and fiscal 2021 respectively similar to 30.4% in fiscal 2020. The gap in average cost of supply and average revenue requirement (ACS-ARR) continues to be high at Rs 0.98 per kilowatt hour (kWh) and 0.94 per kWh in the first half of fiscal 2022 and fiscal 2021 respectively, compared with Rs 0.34 per kWh in fiscal 2020 mainly due to lower revenue realisation, adverse customer mix and higher power purchase expenses. Due to the high proportion of domestic consumers, which has further increased in the current fiscal and past fiscals following lockdowns, transmission and distribution losses remained high at 25.6% and 20.6% in the first six months of fiscal 2022 and fiscal 2021 respectively, compared with 18.5% in fiscal 2020. Furthermore, with higher exposure to rural consumers, collection efficiency remained fairly low in the past. However; in fiscal 2021, collection efficiency improved to 91.3% post receipt of payments from GoUP in March 2021. In the current fiscal, collection efficiency was 89% higher as compared to 85.8% in fiscal 2020. The power sector will remain critical and will be well-supported through increasing subsidies from the state government. Any change in the government's stance towards the sector will be a key monitorable.

 

The discom package of around Rs 28,000 crore under the Atmanirbhar scheme prevented significant build-up of payables for UPPCL, resulting in improvement in the payable position. Furthermore, the company continues to receive support in the form of subsidy and loss funding from the state government, which supports the fiscal performance to some extent. Also, under the revamped distribution sector scheme and Atmanirbhar Bharat package, the company is expected to get government subsidy and government department receivables over the next nine years and three years respectively which shall improve the accrual.

Liquidity: Adequate

The bonds are serviced by electricity receivables from discoms; Rs 20 crore is escrowed each day to service the debt obligation for these rated instruments. Additionally, the bonds’ liquidity is supported by DSRA equivalent to two rolling quarters of debt servicing amount of Rs 939 crore. For proposed bond issuance, Rs 9 crore shall be escrowed each day to ensure bond servicing account is fully funded by T-15 days. Also on quarterly basis, payment shall be received from GoUP through budgetary allocation between 15 to 45 days prior to due date to service the bond obligations. Furthermore, support from the state government in the form of subsidies and access to finance from non-banking financial companies due to its critical utility role, and state government ownership support liquidity.

Outlook Stable

The bonds should continue to benefit from the strong payment structure and support from GoUP in the long term.

Rating Sensitivity factors

Upward factors:

• Sustained improvement in the power sector and reform orientation of the state
• Reduction in indebtedness to below 25% of GSDP

 

Downward factors:

• Sustained increase in indebtedness beyond 50% of GSDP
• Sustained increase in revenue deficit
• Decline in liquidity buffers or non-adherence to the payment structure

Adequacy of credit enhancement structure

The guarantee provided by GoUP is unconditional, irrevocable and covers the entire rated amount of the bonds. A trustee-monitored payment mechanism is in place to ensure timely payment of the interest and principal obligation. The company is adhering to a defined T structure where electricity receivables are escrowed into a bond servicing account on a daily basis so as to adequately fund the account by T-15 days prior to the entire debt servicing requirement for a particular quarter, and additional liquidity cushion in the form of a DSRA for two quarters.

Unsupported ratings  CRISIL BB

CRISIL Ratings has introduced the 'CE' suffix for instruments having an explicit credit enhancement feature, in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the business and financial risk profiles of UPPCL and its subsidiaries. The business risk profile continues to be strong due to monopoly in the power distribution business in the designated service area and the critical role to the state economy. The ACS-ARR gap persists while AT&C losses remain high although with some improvement over the years. The financial risk profile remains weak due to a highly leveraged capital structure and large losses. However the risk is mitigated by the presence of financial flexibility and access to banking facilities.

Additional disclosures for the provisional rating

The provisional rating is contingent upon occurrence of the following steps or execution of the following documents, as applicable:

• Corporate Guarantee deed
• Default Escrow agreement
• UPPCL Account Agreements
• Hypothecation agreement
• Term sheet
• Debenture trustee agreement
• Representation and warranties

The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed and/or confirmations on completion of pending steps within 90 days from the date of issuance of the instrument. The final rating assigned post conversion shall be consistent with the available documents or completed steps, as applicable. In case of non-completion of steps or non-receipt of the duly executed transaction documents within the above-mentioned timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days in line with its policy on provisional ratings.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending steps/ documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL BB/Stable’

Risks associated with the provisional rating:

The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

About the Company

UPPCL was formed on January 14, 2000, by unbundling the Uttar Pradesh State Electricity Board into three separate entities: UPPCL, holding the transmission and distribution business; Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd that houses thermal generation; and Uttar Pradesh Jal Vidyut Nigam Ltd, which holds the hydro generation business. The transmission business was subsequently carved out of UPPCL into an independent government company in 2007, Uttar Pradesh Power Transmission Company Ltd.

 

The five discoms under UPPCL include Dakshinanchal Vidyut Vitran Nigam Ltd (Agra discom), Madhyanchal Vidyut Vitran Nigam Ltd (Lucknow discom), Purvanchal Vidyut Vitran Nigam Ltd (Varanasi discom), Paschimanchal Vidyut Vitran Nigam Ltd (Meerut discom), and Kanpur Electricity Supply Company.

Any other information: Not applicable