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 Uttar Gujarat Vij Company Limited (UGVCL) continue to derive strength from the strong parentage of Gujarat Urja Vikas Nigam 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 Press Release 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 2 CARE Ratings Limited 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).