RATING RATIONALE

14 Feb 2020

Gujarat State Energy Generation Ltd.

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities aggregating to Rs.697.66 Crs of State Energy Generation Ltd. (GSEG)

Particulars Amount Rating* (₹ Cr) Facilities/ Tenure Instrument** Previous Previous Present Present (Nov 2018)

Fund Based – Term 408.00 327.66 Loan BWR A-(CE) Fund Based – BWR A-(SO) 370.00 70.00 Long Term (Stable) CC/WCDL (Stable) Reaffirmed Fund Based – CC/ST - 100.00 (Proposed)

Non-fund Based – - 50.00 SBLC/BG BWR A1(CE) Short Term - Assigned Non-fund Based – - 150.00 SBLC/BG (Proposed)

INR Six Hundred and Ninety-Seven Crores Total 778.00 697.66 and Sixty-Six Lacs Only *Please refer to BWR website www.brickworkratings.com/ for definition of the ratings ​ ​ ** Details of Bank Loan facilities is provided in Annexures-I&II The​ suffix SO has been replaced with CE in compliance with the guidelines of SEBI regarding ratings deriving credit enhancement from third party support.

The Rating is based on Credit Enhancement (CE) in the derived from PPA with GUVNL under which the GUVNL has undertaken to meet the debt obligation requirements along with O&M and variable costs on actuals.

Unsupported (Standalone) rating as assessed by BWR without considering the Credit Enhancement is BWR BBB (Stable) which takes into account the DSRA, Structured payment mechanism and the company being GoG entity.

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RATING ACTION / OUTLOOK

The rating reaffirmation inter-alia factors the completed status of 156.10 MW and 315.43 MW Gas based Combined Cycle Power Plant (CCPP). The rating factors, ownership of the company being with State and Central PSUs, experienced management, long term PPA with GUVNL for purchase of entire power based on SLDC (State Load Dispatch Centre) requirements. The promoters (GSPC) have increased its shareholding to 53.70% as on FY19 from 32.59% as on FY18 through rights issue of Rs.220.32 Crs (of which GSPC share was Rs.158.86 Crs). The rating also factors moderate financial profile, low debt and DE ratio, increase in operating revenues from sale of electricity and expected reduction in interest cost and repayment obligation consequent to fresh loan from GSFS for refinancing all existing term loans with a tenure of 3 years and 11 months.

The rating is however constrained by the low average PLF of 19.86% during Apr’19-Nov’19 for 351.43 MW and 1.57% for 156.10 MW, high dependence on purchase of Gas on SPOT price as no long term contract in place and moderate debt service coverage indicators.

The rating derives credit enhancement from PPA with GUVNL under which GUVNL meets all the debt servicing requirements and meets all O&M and variable costs on reimbursement basis on the condition that plant availability is maintained.

Outlook for the company, remains stable, considering the long term PPA with GUVNL, completed status of the project and fixed and variable costs being met by GUVNL as per terms of PPA.

KEY RATING DRIVERS

Credit Strengths:

Strong Promoters Profile and infusion of equity in FY19: GSEG is owned and promoted GSPC ​ (53.70%), GUVNL (5.72%), other GoG entities (7.70%), KRIBHCO (19.16%), SBI (6.16%), GAIL (4.09%) and IFCI (3.47%) as on FY19. During FY19, GSPC increased its holding to 53.70% from 32.59% as on FY18, by way of Rights issue of Rs.220.32 Crs, of which Rs.158.86 Crs was allotted to GSPC and Rs.61.47 Crs is pending for allotment to Kribhco This has resulted in increased in paid up capital to Rs.507.23 Crs in FY19 from Rs.348.38 Crs in FY18.

Long Term PPA with Ltd. (GUVNL, (Rated BWR AA+/A1+, Jul’19)): The Company has entered into a Power Purchase Agreement (PPA) with GUVNL, for purchase of power in Jun’08 for a period of 25 years, wherein GSEG is required to sell entire power generation to GUVNL. As per PPA, GUVNL is bound to pay the fixed charges including interest and principal obligations and variable cost as per power generation. The entire loan of GSEG is being serviced by ​ GUVNL on reimbursement basis. For 156.10 MW, as the debt has been completely repaid, GUVNL is paying only to the extent of actual generation and for 351.43 MW, GUVNL is paying fixed charges to meet the debt servicing requirements as well as the O&M and other variable expenses.

Completed status of the project: Unit-I of GSEG with capacity of 156.10 MW commenced its operations and achieved COD in 2002 and its unit-II of 351.43 MW achieved COD in Mar’12., it’s the plants are at Hazira he company has a PPA with GUVNL for its both the units.

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Reduction in interest rate: As per GSFS sanction, the rate of interest payable by GSEG is lower by 100 basis points, which is expected to reduce its funding cost going forward. However, since the company is operating at low PLFs the debt is being serviced from fixed charges being reimbursed by GUVNL.

Credit Risks: Moderate financial profile The financial profile of the company has improved with the debt equity of 0.73 as on FY19 after issue of Rights issue during FY19. However other debt service indicators remain moderate with DSCR of 1.13x, and low Current ratio of 0.41x.

Low PLF and power generation: During FY19, for 156.1 MW CCPP (Combined Cycle Power Plant), it has generated 24.21 MU with plant availability of 62.34% and for 351.43 MW CCPP, the generation has been 352.28 MU with plant availability of 90.68%. During FY20 (till Nov’19), for 156.1 MW, average PLF was 1.57% with plant availability of 60.62% and for 351.43 MW, the average PLF was 19.86% with plant availability of 95.15%.

ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale). BWR has taken a consolidated view on the operational and financial performance of the company, promoter’s contribution and current power generation and condition stipulated as per PPA with GUVNL while arriving at rating.

RATING SENSITIVITIES Going forward, ensuring adequate PLF over the next two to three years, generation of adequate operating and net profit from the power generation and sale of electricity to GUVNL, will be key monitorable and sensitivities for the company.

Positive: The Outlook may be revised to “Positive”, if PLF level improves substantially and there is ​ substantial improvement in the financial profile of the company and debt servicing metrics.

Negative: The Outlook may be revised to “Negative”, if the company fails to achieve optimum PLF ​ levels due to adverse changes in offtake levels, there is delay in recovery from GUVNL and there is no improvement in the debt coverage metrics.

LIQUIDITY: Adequate The liquidity of the company remains adequate with Rs.124.97 Crs cash accruals generated during FY19 as against debt repayment of Rs.102.71 Crs in FY19. The debt servicing obligations were met from fixed charges paid by GUVNL. The cash and cash equivalents remained low at Rs.1.10 Crs as on FY19. With the reduction in interest rate and the revised terms of refinancing from GSFS, the financial profile is expected to improve.

COMPANY PROFILE (GSEG) Gujarat State Energy Generation Ltd. (GSEG) was promoted by Gujarat State Petroleum Corporation Ltd. (GSPC, holding 53.70% in GSEG) as on Mar’19. The shareholders of GSEG include GSPC (53.70%), GUVNL (5.72%), other GoG entities (7.70%), KRIBHCO (19.16%), SBI (6.16%), GAIL (4.09%) and IFCI (3.47%) as on FY19 GSEG operates a 156.10 MW gas based Combined Cycle www.brickworkratings.com Page 3 of 7 ​ ​ ​

Power Plant (CCPP, commissioned in 2002) at Hazira in Surat. In March 2012, it commenced commercial operations of its additional 351.43 MW Gas based CCPP adjacent to its existing plant at Hazira. Both the plants are available for power generation as per the requirement of State Load Dispatch Centre (SLDC). The project receives Re-gasified Liquefied Natural Gas (RLNG) through a separate pipeline from GSPL. GSEG and GUVNL (Gujarat Urja Vikas Nigam Ltd.) have entered into a Power Purchase Agreement, under which GSEG sells the entire generated electricity in bulk to GUVNL. ​

GUVNL (Purchaser of Power under PPA): Gujarat Urja Vikas Nigam Ltd. (GUVNL) is an ​ ​ ​ electrical services umbrella company in the state of Gujarat, India. Gujarat Electricity Board (GEB) was established in 1960 to generate, purchase, transmit and distribute electric power in the state of Gujarat. Consequent to the Electricity Act, 2003 and Gujarat Electricity Industry (Reorganization and Regulation) Act, 2003, the erstwhile GEB was reorganized (w.e.f. April 1, 2005) into seven companies, viz. Gujarat Urja Vikas Nigam Limited (GUVNL), the Holding Company and six subsidiaries of GUVNL, which includes one Genco, one Transco and four Discoms as mentioned below.

Gujarat Urja Vikas Nigam Limited (GUVNL), Holding Company and its Six subsidiaries: 1. Gujarat State Electricity Corporation Limited (GSECL), Generation Company 2. Gujarat Energy Transmission Corporation Limited (GETCO), Transmission Company 3. Dakshin Gujarat Vij Company Limited (DGVCL), Distribution Company 4. Company Limited (MGVCL), Distribution Company 5. Company Limited (PGVCL), Distribution Company 6. Company Limited (UGVCL), Distribution Company

Operations of GUVNL mainly include purchase of power from power producers like Gujarat State Electricity Corporation Ltd. (GSECL), Central sector and other IPPs in the State, and sale of power to Distribution Companies (Discoms) and power distribution licensees in Gujarat by using transmission lines of Gujarat Energy Transmission Corporation Ltd. (GETCO). In addition, the Company is ​ responsible for overall coordination & supervision of the activities of its Subsidiary Companies which also includes working capital management and managing the overall loan portfolio on behalf of its Subsidiaries.

Key Terms of PPA: GSEG has signed PPA with GUVNL wherein GSEG is required to sell its entire power generation to GUVNL. Monthly tariff consists of: (i) Fixed Charges; (ii) Monthly Availability Adjustment; (iii) Energy Charge and (iv) Incentive Charge. Once the plant has achieved COD, GUVNL is bound to pay to GSEG fixed monthly charges throughout the tenor of PPA. Fixed Charges include: ● Capacity Charge in the month, ● Interest on loan capital in the month, ● Depreciation, including Advance against Depreciation in month, ● Operation and Maintenance Expenses in month, ● Return on Equity in month, ● Cost of Interest on Working Capital in Month

COD for both 156.10 MW and 351.43 MW, units have been achieved, and GUVNL is making payment in accordance with the PPA. Fixed and variable Charges paid by GUVNL for FY19 was

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Rs.400.55 Crs. However, GUVNL is not providing a RoE on the basis of mutual understanding as the plant is operating at very low PLFs

KEY FINANCIAL INDICATORS (in INR Crs) Operating revenues from sale of electricity generation have grown by 33.23% to Rs.465.82 Crs in FY19 from Rs.349.64 Crs in FY18, mainly on account of higher sale of energy to GUVNL. However, the company’s EBITDA decreased by 12.73% to Rs.185.33 Crs in FY19 from Rs.212.36 Crs in FY18, . Total Debt stood at Rs.374.20 Crs, with CPLTD of Rs.102.71 Crs as on FY19. Its Networth ​ improved to Rs.514.75 Crs as on FY19 from Rs.243.28 Crs as on FY18 on account of rights issue during FY19. During Apr’19-Nov’19, its operating income stood at Rs.295.14 Crs from sale of electricity.

FINANCIAL INDICATORS - ISSUER Key Parameters Units FY18 FY19 Result Type Audited Audited Operating Income Rs. Crs 349.64 465.82 EBITDA Rs. Crs 212.36 185.33 PAT Rs. Crs 75.35 53.59 Tangible Networth Rs. Crs 243.28 514.75 D: E Ratio Times 2.80 0.73 Current Ratio Times 0.30 0.41

KEY FINANCIAL INDICATORS (in INR Crs) – GUVNL (Purchaser of Power under PPA) On a consolidated basis, GUVNL’s operating income increased by 15.96% to Rs.49719.35 Crs in FY19 from Rs.42861.21 Crs in FY18. However, its EBITDA declined by 15.85% to Rs.4864.31 Crs in FY19 from Rs.5780.52 Crs in FY18, mainly due to higher average purchase cost per unit as without a corresponding adequate increase in average per unit realization. But its profitability has increased by 73.86% to Rs.996.47 Crs in FY19 from Rs.573.14 Crs in FY18, due to lower depreciation and interest charges. Its debt to equity marginally reduced to 0.60x in FY9 from 0.77x as on FY18 with the tangible net Worth of Rs.26,631.65 Crs as on FY19 due to equity infusion of Rs.3544.67 Crs by GoG in FY19. Current ratio remains less than one as on FY18.

KEY COVENANTS OF THE INSTRUMENT/FACILITY RATED The terms of sanction of loans from banks and GSFS include standard covenants normally stipulated for such facilities by Banks/GSFS. The Term loan facilities from banks were fully repaid with refinancing from GSFS.

NON-COOPERATION WITH PREVIOUS RATING AGENCY IF ANY: NA

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RATING HISTORY

Instrument/ Current Rating Rating History Facility Tenure Amount (Long Term/ Rating Nov 2018 Aug 2017 2016 ( Cr) Short Term) ₹ BWR A-(CE) Fund based – BWR A-(SO) BWR A-(SO) Long Term 327.66 (Stable) NA Term Loan (Stable) (Stable) Reaffirmed BWR A-(CE) Fund Based – BWR A-(SO) BWR A-(SO) Long Term 170.00 (Stable) NA CC/ Proposed (Stable) (Stable) Reaffirmed BWR Non-fund based A1(CE) – SBLC/BG/ Short Term 200.00 NA NA NA (Stable) Proposed Assigned INR Six Hundred and Ninety-Seven Crores and Sixty-Six Total 697.66 Lacs Only

COMPLEXITY LEVELS OF THE INSTRUMENTS

For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf ​ Hyperlink/Reference to applicable Criteria

● General Criteria

● Approach to Financial Ratios

● Infrastructure Sector

Analytical Contacts Investor and Media Relations

Mukesh Mahor Senior Manager – Ratings M: +91 7738875550 Primary Analyst B: +91 22 6745 6666 Board: +91 80 4090 9940 Ext: 333 [email protected] ​ [email protected]

Vipula Sharma Director – Ratings Board: +91 80 4090 9940 [email protected]

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Gujarat State Energy Generation Ltd. (GSEG)

ANNEXURE I th Details of Bank Facilities rated by BWR (As on 16 ​ Jan 2020) ​ Name of the Type of Long Term Short Term Total Sl. No. Bank Facilities (₹ Cr) (₹ Cr) (₹ Cr) Gujarat State 1. Financial Services Term Loan 327.66 - 327.66 Ltd. 2. Dena Bank WCDL/BG 19.22 - 19.22 SBLC/BG/Bill 3. Bank of Baroda 27.45 50.00 77.45 Discounting CC/WCDL/Bill Bank of 4. Discounting/ 23.33 - 23.33 Maharashtra BG/LC Fund Based – 5. CC/WCDL 100.00 - 100.00 Proposed Non-Fund Based – 6. BG/LC/SBLC - 150.00 150.00 Proposed TOTAL 697.66 Total Rupees Six Hundred and Ninety-Seven Crores and Sixty-Six Lacs only. ​ ​

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DISCLAIMER Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented “as is” without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons.

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