| U. P. Power Corporation Limited | ||||||||||
| 'CRISIL A+ (CE) /Stable' Converted from Provisional Rating to Final Rating for Rs.3488 crore Bond | ||||||||||
| Rating Action | ||||||||||
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| & A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015 directive ‘Standardizing the term, rating symbol, and manner of disclosure with regards to conditional/ provisional/ in-principle ratings assigned by credit rating agencies' by Securities and Exchange Board of India (SEBI) and April 27, 2021 circular ‘Standardizing and Strengthening Policies on Provisional Rating by Credit Rating Agencies (CRAs) for Debt Instruments’ respectively by SEBI. | ||||||||||
| 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 converted its provisional rating on the Rs 3,488 crore bond issuance programme of U. P. Power Corporation Limited (UPPCL) to a final rating of ‘CRISIL A+ (CE) /Stable’. CRISIL Ratings has also reaffirmed its ‘Provisional CRISIL A+(CE)/CRISIL A+(CE)/Stable’ rating on the other bonds of UPPCL.
CRISIL Ratings has received the required documents including the final executed corporate guarantee for this transaction. This executed document is in line with terms of the transaction when provisional rating was assigned. Hence, CRISIL Ratings has converted the provisional rating to a final rating.
The rating continues to reflect the strength of an 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 a daily basis so as to adequately fund the account by T-15 days (wherein T is the due date) prior to the entire debt obligation for that quarter.
The proposed bond issuance of Rs 8,000 core (Rs 7,536.8 crore already raised), too, factors in the strength of an unconditional and irrevocable guarantee provided by the GoUP, expected state budgetary allocation covering the entire debt obligation, trustee-administered escrow and payment mechanism for the bonds and expected liquidity of two quarters in the form of DSRA. In case of any cashflow mismatch, additional revenue stream can also be trapped.
The rating also reflects high dependence of the GoUP on the Centre for revenue along with healthy own-tax buoyancy leading to large revenue surplus since fiscal 2007. These strengths are partially offset by 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 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:
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 a daily basis such 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 case of shortfall in the 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.
The proposed bond issuance of Rs 8,000 crore (Rs 3,951.2 crore already raised in March 2022 and Rs 3,488 crore in October 2022) 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.
Uttar Pradesh is the third-largest state in India 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; this is a marginal decrease from the earlier share of 17.96% (recommended by the 14th Finance Commission) and remains a key driver contributing to ~40% of overall revenue receipts.
Uttar Pradesh has had revenue surpluses since fiscal 2007 on account of large inflow of CTD. Revenue surplus increased significantly in fiscal 2022 owing to strong tax collections at the Centre and State Goods and Services Tax collections amid strong recovery. Tax buoyancy in the state continues to be healthy, with own-tax revenue being 7-8% of the GSDP.
Weaknesses:
Uttar Pradesh has weak demographic and socio-economic positioning and lower per-capita income compared with other states. 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 in the long term.
Total debt plus guarantee to GSDP declined to 43% in fiscal 2022 (basis Comptroller and Auditor General of India (CAG) data) from 45.2% in the previous fiscal because of higher revenue surplus owing to strong recovery in fiscal 2022; however, it continues to be high. The gross fiscal deficit to GSDP remained high at 2.6% in fiscal 2022 (CAG) against 2.9% in fiscal 2021. The state has not utilised ways and means.
The state’s power reforms have lagged, as discoms did not meet the operational and financial targets laid under Ujwal Discom Assurance Yojana. The aggregate technical and commercial (AT&C) loss remained high at 31.3% and 27.2% in the first half of fiscals 2022 and 2021, respectively, similar to 30.4% in fiscal 2020. The gap in average cost of supply and average revenue requirement (ACS-ARR) remained high at Rs 0.98 per kilowatt hour (kWh) and 0.94 per kWh in the first half of fiscals 2022 and 2021, respectively, compared with Rs 0.34 per kWh in fiscal 2020 because of lower revenue realisation, unfavourable customer mix and higher power purchase expenses.
On account of the high proportion of domestic consumers, which increased in the past fiscals following lockdowns, transmission and distribution losses remained high at 25.6% and 20.6% in the first six months of fiscals 2022 and 2021, respectively, compared with 18.5% in fiscal 2020. With higher exposure to rural consumers, collection efficiency had 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 fiscal 2022, 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 Bharat Abhiyan prevented significant build-up of payables for UPPCL, thereby improving the payable position. Furthermore, the company continues to receive support in the form of subsidy and loss funding from the state government, which supports fiscal performance to some extent. Also, under the revamped distribution sector scheme and Atmanirbhar Bharat Abhiyan, the company is expected to receive government subsidy and government department receivables over the next nine and three years, respectively, which shall increase cash 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 of Rs 939 crore and Rs 193 crore DSRA for recently raised bonds. For proposed bond issuance (Rs 7,536.8 crore already raised), Rs 9 crore shall be escrowed each day to ensure the bond servicing account is fully funded by T-15 days. Also, on a quarterly basis, payment shall be received from the GoUP through budgetary allocation 15-45 days prior to the due date for servicing the bond obligation. Support from the state government in the form of subsidies, access to finance from non-banking financial companies because of the company’s critical utility role and state government ownership further aid liquidity. |
Outlook: Stable The bonds should continue to benefit from the strong payment structure and support from the GoUP in the long term. |
Rating Sensitivity factors Upward factors
Downward factors
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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 DSRA for two quarters. |
Unsupported ratings: CRISIL BB CRISIL Ratings has introduced the 'CE' suffix for instruments with an explicit credit enhancement feature, in compliance with the SEBI 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 company’s business risk profile remains strong because of its monopoly in the power distribution business in the designated service area and its critical role to the state economy. The ACS-ARR gap persists and 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, this 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:
The provisional rating shall be converted into a final rating after receipt of the transaction documents duly executed and/or confirmations on completion of the pending steps within 90 days from the date of issuance of the instrument. The final rating assigned after conversion shall be consistent with the available documents or the 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 the pending steps/documentation considered while assigning a 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, which handles the transmission and distribution business; Uttar Pradesh Rajya Vidyut Utpadan Nigam Ltd, which 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 are 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. |
Key Financial Indicators
^including guarantees *CRISIL Ratings-adjusted numbers
Key financial indicators (consolidated)
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List of covenants Salient features of the bond backed by the state government guarantee
List of covenants for the proposed bonds Salient features of the proposed bond issuance backed by the state government guarantee
Transaction structure Assuming T is the bond issuance day and T1, T2 and T3 are the subsequent bond payment dates, one quarter apart:
Any major change in the salient features or transaction structure in the final documents would be a rating sensitivity factor
Proposed bond issuance
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Not yet placed |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
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