Press Release

Uttar Gujarat Vij Company Limited

March 6, 2020 Ratings Amount Facilities Ratings1 Rating Action (Rs. Crore) Long term Bank 325.00 CARE AA-; Stable Reaffirmed Facilities (Enhanced from 275.00) [Double A Minus; Outlook: Stable] Short term Bank CARE A1+ 93.50 Reaffirmed Facilities [A One Plus] CARE AA-; Stable / CARE A1+ Long /Short term 79.75 [Double A Minus; Reaffirmed Bank Facilities Outlook: Stable / A One Plus] 498.25 Total Facilities (Rs. Four Hundred Ninety Eight Crore and Twenty Five Lakh only) Details of facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Company Limited (UGVCL) continue to derive strength from the strong parentage of Limited (GUVNL; rated CARE AA-; Stable / CARE A1+), being wholly owned by Government of Gujarat (GoG), GUVNL’s regulated operations based on ‘cost-plus’ tariff structure with conducive regulatory environment for power sector in the state of Gujarat which is evident from track record of regular tariff revisions and implementation of fuel cost pass through mechanism; and largely stable operating profile of all the power distribution subsidiaries of GUVNL having good control over aggregate technical & commercial (AT&C) losses, which, despite a marginal increase in FY19, continue to be not only significantly lower than the national average AT&C loss but also lower than that approved by the regulator (except in case of UGVCL). These have led to steady growth in its total operating income (TOI) and profitability along with adequate cash flows and comfortable liquidity. Furthermore, need-based equity infusion by GoG and steady cash flows have resulted in reduction in consolidated debt levels of GUVNL and comfortable leverage, which ultimately depicts its strong financial flexibility. The long-term rating is, however, constrained on account of GUVNL’s high dependence on subsidy from GoG (albeit the same is being received regularly) arising from supply of power to agricultural category consumers, inherent risk associated with rise in power purchase cost due to fuel price fluctuations and the corresponding lag of at-least one quarter under the fuel cost pass through mechanism, increased purchase of power at relatively higher cost from short term sources on account of intermittent power supply by major Individual Power Producers (IPPs) termination of some capacities, moderate operational parameters of its own power generation plants and stabilisation risks associated with recently commissioned projects.

Rating sensitivities Positive factors  Significant improvement in AT&C losses of discoms below 10% on a sustained basis  Improvement in PLF levels and overall generation from GSECL’s power plants Negative factors  Delay in receipt of equity and subsidy support from GoG  Significant debt funded expansion plans adversely impacting the group’s overall financial performance and debt coverage indicators  Any significant revenue gap not allowed to be passed through in the tariff on a sustained basis  Any adverse changes in the regulatory environment governing power sector in the state of Gujarat

Detailed description of the key rating drivers Key Rating Strengths Government company with strong parentage of GoG which has demonstrated its need-based support to GUVNL GUVNL was incorporated as a government company with 100% equity share capital being held by GoG upon unbundling of the erstwhile Gujarat Electricity Board (GEB) as a part of domestic power sector reforms. Post unbundling of GEB, GoG has demonstrated considerable support to GUVNL and its subsidiaries mainly in the form of equity infusion and disbursement of grants and subsidies.

1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited

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Conducive regulatory framework for power sector along with GUVNL’s regulated operations under cost-plus tariff scheme and revenue visibility through Multi-Year Tariff (MYT) order Since unbundling of GEB, there has been timely filing of tariff petitions and simultaneously there has been timely issuance of tariff order on a yearly basis. MYT petitions are also filed in time. There has been timely issuance of true-up order by Gujarat Electricity Regulatory Commission (GERC). This conducive regulatory framework has provided a level playing field for the power sector companies of GUVNL group. Effective implementation of fuel and power purchase cost pass-through mechanism has helped the GUVNL group whereby power purchase cost is reviewed on a quarterly basis and the required revision in fuel surcharge (FPPPA) is made applicable from the next quarter without intervention of the regulator if fuel surcharge revision is up to 10 paisa and with the intervention of the regulator for fuel surcharge revision above 10 paisa. Over past many years, this mechanism is being followed which reduces the revenue gap at the time of true-up process.

Long-term Power Purchase Agreements (PPAs) at competitive rates; albeit restricted power supply by some IPPs off late, including termination of some capacity GUVNL being a power purchaser on behalf of all the distribution companies and power distribution licensees in the State of Gujarat has one of the best power purchase infrastructures in place whereby it has entered in to long-term PPAs with power generators at reasonably low prices and hence, provides significant economies of scale in the business. Also, upon unbundling of GEB, GUVNL renegotiated all the existing PPAs with different IPPs which resulted in substantial savings for the group. PPAs have been allocated by GUVNL amongst its various discoms in such a way that each discom is sustainable on a long-term basis. Further, GUVNL also procures power through renewable sources by floating tenders through competitive bidding, thereby achieving both, fulfilment of its renewable power purchase obligation (RPO) as well as procuring power at much lesser cost as compared to conventional sources of power. However, intermittent power supply witnessed by GUVNL from some of the imported coal-based IPPs in Gujarat has necessitated GUVNL to procure power from relatively expensive short term sources and through merchant purchases from exchanges. Further, on July 02, 2019, SC approved termination of Bid-02 PPA of 1,234 MW with APMuL with effect from January 4, 2010 allowing APMuL to recover compensation from GUVNL for the past losses incurred by APMuL. The amount of compensation, if any, required to be paid by GUVNL, once determined by CERC, is expected to be largely recovered by GUVNL from its consumers by way of tariff revision. Any significant under recovery of revenue gap on a sustained basis would be a key credit monitorable. Post this termination GUVNL’s share of power sourced from merchant is likely to increase from around 7-8% in FY19 to around 12-13% and its share of power from the capacities where the fuel cost is pass through is likely to increase from around 62% (including merchant) in FY19 to 68% going forward. This could be partially mitigated by the increasing capacities being tied up with renewable power IPPs which are mostly fixed price in nature.

Strong financial flexibility of GUVNL along-with common treasury management There has been common treasury management by GUVNL on behalf of its six subsidiaries. GUVNL is required to make payment to GSECL for power purchase and to GETCO for transmission charges whereas it collects power cost from discoms. Accordingly, GUVNL handles the treasury of all the entities and excess funds in one company are channelized to the other company where it is required, which leads to significant savings in interest expenses and convenience. Further, GoG infuses the required equity in GUVNL for on-going projects of utilities which is being disbursed by GUVNL depending upon the progress and requirement. GUVNL has also been sanctioned a Line of Credit from Gujarat State Financial Services Ltd. (GSFS) which is wholly owned by GoG and is registered with RBI as a Non-Banking Finance Company (NBFC) whereby borrowing cost is reasonably lower compared with bank finance. Consequently, the capital structure of GUVNL has continued to remain comfortable marked by low overall gearing on a consolidated level as on March 31, 2019 and moderate total debt to gross cash accruals ratio. Also, GUVNL has significant amount of un-utilized working capital limits which further provides liquidity comfort.

Steady operating and financial performance of the group GUVNL’s operating and financial performance on consolidated basis was stable during FY19. Its total operating income (TOI) grew by around 16% due to the consistently rising demand for power in the state along with regular tariff revisions. However, its PBILDT margin declined from 16.16% in FY18 to 11.55% in FY19 due to rise in power purchase cost and marginal increase in the AT&C losses. Power purchase cost increased by around 25% y-o-y in FY19 as compared to 16% y-o-y growth in TOI. Due to rise in fuel costs in FY19 along with increase in the quantum of power procured from the relatively costlier merchant and other short term sources. Despite fuel cost pass through mechanism being in place and tariff revisions in FY19, GUVNL’s discoms have not been able to pass through this rise in power purchase cost entirely to its consumers in a timely manner. Further, AT&C loss of the group increased marginally from 11.87% in FY18 to 13.09% in FY19 due to change in the consumer demand profile in PGVCL during FY19, significant demand from agriculture segment in UGVCL and release of new agricultural connections during the pre-elections period in 2019. However, given GUVNL’s good operating efficiency, its PAT margin has

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Press Release improved from 1.31% in FY18 to 1.97% in FY19 largely on account of significant reduction in interest cost (upon pre-payment of significant amount of debt of BECL post its merger with GSECL). Further, given the regulated nature of its business model, GUVNL’s interest coverage remained comfortable at 3.53 times in FY19. Also, capital structure of the group has improved with improvement in overall gearing from 0.63x as on March 31, 2018 to 0.49x as on March 31, 2019 upon repayment of debt and increase in net-worth due to infusion of equity by GoG. Consolidated debt level of GUVNL reduced from Rs.19,198 crore as on March 31, 2018 (restated post-merger of BECL) to Rs.17,299 crore as on March 31, 2019 and further to Rs.10,556 crore as on January 31, 2020.

Key Rating Weaknesses Reliance on subsidy support from GoG w.r.to agricultural power sales From FY17 onwards, GUVNL changed its accounting policy for recognizing subsidy income from accrual basis to reasonable assurance basis. The total subsidy assessed as a % of its TOI remained relatively stable in the range of 10%-15% during the past three years. GUVNL received total subsidy of Rs.7,119 crore during FY19 as against total subsidy support for agricultural power sales during FY19 of Rs.6,944 crore (Rs.4,407 crore for FY18), out of which around Rs.4,700 crore (Rs.4,200 crore for FY18) was adjusted against electricity duty collected by discoms and payable to GoG, while the remaining excess subsidy received was adjusted against past dues. As on March 31, 2019 the outstanding subsidy receivable of GUVNL stood at Rs.3,246 crore. As major portion of subsidy requirement of GUVNL is adjusted against electricity duty, it provides liquidity to the group and insulates it from any delays in release of subsidy from GoG. Moreover, GoG has provided additional subsidy allocation of Rs.2,067 crore to GUVNL during FY20.

Significant pay-out to gas based power plants along-with low PLFs of own power generation plants; albeit rise in the share of solar and wind power PPAs at lower prices Although the power generation by GSECL’s power plants witnessed some increase during FY19, power generation has reduced during 9MFY20. Its average PLF dipped from 50.69% in FY19 to 36.11% in 9MFY20 due to it being a relatively costlier source of power for GUVNL. The intermittent power supply witnessed by GUVNL from some of the imported coal-based IPPs in Gujarat is currently being sourced from short term sources and through merchant purchases from exchanges. Further, GUVNL continued to purchase power from various gas-based power plants of GSECL and other IPPs, where it already has an established practice of making payment for bare minimum fixed cost even without corresponding power off-take due to their higher variable cost of power generation. During FY19, GUVNL’s power purchase cost increased by around 25% due to rise in fuel prices. However, GUVNL has been trying to lower its overall cost of power purchase by increasing the share of low cost renewable sources of power in its overall mix. GUVNL now has outstanding PPAs for purchase of solar power of around 3,537 MW and wind power of around 4,354 MW. Majority of the existing solar PPAs were entered few years back at a very high cost as compared to conventional sources; albeit their share in total power purchase is now very small. GUVNL has entered into 25 year PPAs with Tata Power Renewable Energy Ltd. for a total capacity of 400 MW with tariff of Rs.2.75/kWh. Also, GUVNL has entered into a 25 year PPA at Rs.2.44/kWh for a 30MW wind project in Morbi district. Further, GSECL has recently commissioned a 75 MW solar project at Dhuvaran and is in process of commissioning two other solar projects at Raghanesda. In February 2020, GUVNL has issued Request for Selection (RfS) for procuring power from 500MW of grid connected solar projects (phase VIII), wherein the maximum rate has been fixed at Rs.2.65/kWh and 25 year PPAs are proposed to be executed between GUVNL and the developer. The bids for these tenders / auctions are selected by way of e-reverse auction wherein the power purchase costs is relatively lower as compared to both conventional power and solar power procured through the earlier Feed-in-Tariff (FiT) regime.

On-going capital expenditure program largely augmenting the renewable capacity and stabilization risk associated with recently commissioned capacity GUVNL’s subsidiaries, being state power utilities, are involved in various new projects as well as renovation of existing power plants. GSECL recently commissioned two power generation projects, a 75 MW solar project at Dhuvaran and an 800MW super critical coal based plant at Wanakbori. While the Dhuvaran solar project is operating at PLF of 21.70% during 9MFY20, the Wanakbori plant faced initial challenges and is currently operating at a low PLF of just 20.57% during 9MFY20. As a part of continually augmenting generating capacity, GSECL is also implementing two solar power projects of 100 MW each at Raghanesda. The group has capital expenditure plans of around Rs.6,100 crore p.a. during FY20-FY22 which are planned to be funded by debt and equity in the ratio of 2.33:1 apart from infusion of grants and consumer contributions by GoG. Apart from inherent risk of project implementation and its stabilization, dependence on government for subsidies, grants and equity capital also poses a risk to some extent. However, GUVNL group has vast experience in execution of similar projects and there is demonstrated support from GoG for funding majority portion of the total capital expenditure, which reduces the project risk to an extent. GoG has infused equity of Rs.2,767 crore in GUVNL during FY19 and Rs.2,019 crore during 7MFY20.

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Liquidity: Strong GUVNL centrally handles the working capital requirement of itself and its six subsidiaries. GUVNL purchases power from GSECL, Central Sector, IPPs and from renewable energy sources and sells power to discoms. GUVNL receives payment from discoms and pays it to power generation companies including GSECL. Total working capital limit is being handled by GUVNL on behalf of all its subsidiaries with certain portion allocated to subsidiaries for their own management. GUVNL also has sanctioned limits from GSFS to meet any cash flow mismatches in addition to significant unutilised fund based working capital limits distributed among its six subsidiaries. Average working capital limit utilisation of GUVNL along-with its subsidiaries has been very comfortable at 5.61% during the last 12-month period ended December 31, 2019 which provides significant liquidity. Demonstrated timely support by GoG in the form of equity infusions, subsidies and grants also provide significant comfort to its liquidity. Further, GUVNL on a consolidated level had free cash and bank balance of Rs.401 crore as on March 31, 2019.

Analytical approach: Combined CARE has taken combined analytical view of UGVCL along with its other distribution, transmission, generation entities and the holding entity (GUVNL) since they all operate on a common management and operational platform wherein the holding company manages the cash flows at a consolidated level. For arriving at the combined financials, CARE has considered the consolidated financials of GUVNL. List of entities getting consolidated is as per annexure – 3.

Applicable Criteria Criteria on assigning ‘outlook’ and ‘credit watch’ to Credit Ratings CARE's Policy on Default Recognition Criteria for Short Term Instruments Rating Methodology: Consolidation and Factoring Linkages in Ratings Rating Methodology - Infrastructure Companies Rating Methodology - Private Power Producers Rating Methodology – Power Transmission Projects Financial ratios - Non- Financial Sector

About the Company UGVCL was incorporated in April 2005 with the objective of carrying out the power distribution activity in dedicated areas of erstwhile Gujarat Electricity Board (GEB) in the form of a separate company as a part of domestic power sector reform vis-à- vis unbundling exercise in compliance with Electricity Act 2003. Consequent to Gujarat Electricity Industry (Reorganization and Regulation) Act, 2003, the erstwhile GEB was reorganized (w.e.f. April 1, 2005) into seven companies, viz. GUVNL and its six subsidiaries as follows:

1. Gujarat State Electricity Corporation Ltd. (GSECL-Generation company) 2. Gujarat Energy Transmission Corporation Ltd. (GETCO-Transmission company) 3. UGVCL-Distribution company 4. Dakshin Gujarat Vij Company Ltd. (DGVCL-Distribution company) 5. Company Ltd. (MGVCL-Distribution company) 6. Company Ltd. (PGVCL-Distribution company)

It has been operating power distribution lines as licensee for the northern region of Gujarat covering six full districts and three part districts in western and central areas serving 3.57 million consumers through 499 sub-stations and 21 division offices throughout its operational area covering 4 circles. UGVCL’s distribution losses deteriorated significantly from 8.31% in FY18 to 11.19% in FY19 due to which its AT&C losses deteriorated from to 8.31% in FY18 to 11.16% in FY19.

Brief financials of UGVCL (Standalone) are placed below:

Brief Financials (Rs. crore) FY18 (A) FY19 (A) Total Operating Income 10,253 12,307 PBILDT 459 382 PAT 101 37 Overall Gearing (times) 0.02 0.02 Interest Coverage (times) 5.22 4.35 A: Audited

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Brief financials of GUVNL (Consolidated) are placed below:

Brief Financials (Rs. crore) FY18 (A) FY19 (A) Total Operating Income 43,721 50,703 PBILDT 7,066 5,854 PAT 573 996 Overall Gearing (times) 0.63 0.49 Interest Coverage (times) 3.79 3.53 A: Audited Note: FY18 has been restated post-merger of BECL with GSECL

Status of non-cooperation with previous CRA: Not applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure - 2

Annexure-1: Details of Facilities/Instruments Name of the Date of Coupon Maturity Size of the Issue Rating assigned Instrument Issuance Rate Date (Rs. crore) along with Rating Outlook Fund-based - LT-Cash Credit - - - 325.00 CARE AA-; Stable

Non-fund-based - ST-BG/LC - - - 93.50 CARE A1+

Non-fund-based - LT/ ST- - - - 79.75 CARE AA-; Stable / Deferred Payment CARE A1+ Guarantees

Annexure-2: Rating History of last three years Sr. Name of the Current Ratings Rating history No. Instrument/Bank Type Amount Rating Date(s) & Date(s) & Date(s) & Rating(s) Date(s) & Facilities Outstanding Rating(s) Rating(s) assigned in 2017- Rating(s) (Rs. crore) assigned in assigned in 2018 assigned in 2019-2020 2018-2019 2016-2017 1. Fund-based - LT-Cash LT 325.00 CARE AA- - 1)CARE AA-; 1)CARE AA-; Stable - Credit ; Stable Stable (12-Apr-17) (28-Mar-19) 2)CARE AA-; Stable (02-Apr-18) 2. Non-fund-based - ST- ST 93.50 CARE - 1)CARE A1+ 1)CARE A1+ - BG/LC A1+ (28-Mar-19) (12-Apr-17) 2)CARE A1+ (02-Apr-18) 3. Non-fund-based - LT/ ST- LT/ST 79.75 CARE AA- - 1)CARE AA-; 1)CARE AA-; Stable - Deferred Payment ; Stable / Stable / / CARE A1+ Guarantees CARE CARE A1+ (12-Apr-17) A1+ (28-Mar-19) 2)CARE AA-; Stable / CARE A1+ (02-Apr-18) 4. Fund-based - LT-Term LT - - - - 1)Withdrawn - Loan (12-Apr-17)

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Annexure-3: List of entities considered for consolidated analysis Sr. No. Name of company % of holding by GUVNL 1 Gujarat State Electricity Corporation Ltd. 100.00 2 Gujarat Energy Transmission Corporation Ltd. 98.27 3 Dakshin Gujarat Vij Company Ltd. 100.00 4 Madhya Gujarat Vij Company Ltd. 100.00 5 Uttar Gujarat Vij Company Ltd. 100.00 6 Paschim Gujarat Vij Company Ltd. 100.00

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

Contact us Media Contact Mradul Mishra Contact no. - +91-22-6837 4424 Email ID - [email protected]

Analyst Contact Naresh M. Golani Contact no. - 079-4026 5618 Email ID – [email protected]

Relationship Contact Deepak Prajapati Contact no. - 079 – 4026 5656 Email ID – [email protected]

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