RATING RATIONALE 22 Jan 2020 Udupi Power Corporation Ltd. Brickwork Ratings assigns the unsupported rating to the Performance Bank Guarantee facility of Udupi Power Corporation Ltd. (UPCL or “the Company”) Particulars Amount (₹ Cr) Rating* Facility** Tenure Previous Previous Present Present (Sep 2019) Financial Bank Long BWR A- (CE) BWR A- (CE) 210 210 Guarantee Term (Stable) (Stable) *Please refer to BWR website www.brickworkratings.com/ for definition of the ratings ​ ​ Standalone Unsupported Rating of the Company as per BWR’s assessment is BWR A- (Stable) RATING ACTION / OUTLOOK BWR reaffirmed the rating of BWR A-(CE) (Stable) for the Financial Bank Guarantee facility of UPCL. CE indicates credit enhancement derived from the security cover of 1.5x for 75% of the Bank Guarantee amount by the pledge of shares of Adani Transmission Ltd. [ATL, rated BWR AA+(Stable)], besides 25% cash margin. BWR has also assigned a standalone (unsupported) rating of A-(stable) for the above bank facility. The rating factors, inter alia, group’s experience in the power sector with demonstrated ​ ​ track record in successfully executing various thermal power plants, revenue visibility with long term PPAs for entire generation capacity of UPCL, established coal sourcing and transportation arrangement, comfortable security and availability of liquidity in the form of cash margin and pledge of listed shares as detailed above. However, the rating is constrained by moderate risk profile of the off takers (Karnataka and Punjab Discoms), market volatility of the share price of Adani Transmission Ltd., and increasing overall debt levels of the group. The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. The rating outlook may be revised to 'Negative' if the overall operating and financial performance www.brickworkratings.com Page 1 of 6 ​ ​ ​ of the company is weak, and the cash generated inadequate, necessitating frequent recourse to the DSRA arrangement. KEY RATING DRIVERS Credit Strengths: Group’s experience in Power business: Adani Group owns India’s largest private ​ sector thermal power generator through Adani Power Ltd and also India’s largest private sector power transmission company, ATL. Through Adani Enterprises Ltd [AEL, rated BWR A1+], the Group is India’s largest coal importer – thereby deriving significant competitive advantage, as the critical areas of fuel linkages, generation, transmission and Power Purchase Agreements (PPAs) are all taken care of. Revenue visibility with long term PPAs: The Company has entered into Power Purchase Agreements (PPAs) with state distribution companies of Karnataka and Punjab under CERC Regulatory Guidelines providing full pass through of the fuel and other costs with normative 15.50% return on the equity provided normative PAF of 85% is maintained by the company. The company achieved PAF of ~90% in FY19 and 1HFY20, thus enabling recovery of full fixed cost as well as ROE. Established coal sourcing & transportation arrangements: UPCL’s power plant is ​ based on imported coal as fuel for both its units. UPCL has entered into Fuel Supply Agreements (FSA) for import of coal. Also, UPCL sources coal from spot purchases / e-auctions upon presence of Adani group in procurement & trading of imported coal along with presence in the entire energy value chain. Imported coal is received at New Mangalore Port through ships, which is at a distance of ~35 km from the plant site. UPCL has set-up a dedicated captive jetty there. Coal is unloaded from the ships at this dedicated jetty on coal conveyors and transported to the storage yard located near the port. The coal is transported to the plant site by rail for which it has entered in to a coal transportation agreement with Konkan Railways. Cash margin and additional security: The Company is required to maintain the margin of 25% of the facility amount in the form of FD under lien with YBL. Balance 75% is secured 1.5x by the pledge of shares of Adani Transmission Ltd. (ATL) during the tenor of the facility. As and when there is a claim under the guarantee by UPCL’s project lenders, the Bank is required to pay the same immediately. The Bank can adjust the claim amount from the security it has in the form of cash and share-pledge. DSRA guarantee has a provision for reinstatement of amount, once UPCL reimburses the claimed amount to the BG issuing Bank. So far, there has been no occasion when the BG has been invoked for meeting the repayment obligations. Credit Risks: Moderate credit profile of the Off-takers: UPCL has entered into a 25-year PPA with five Discoms of Karnataka for 90% of the capacity. For balance 10% of the capacity, it has www.brickworkratings.com Page 2 of 6 ​ ​ ​ signed another PPA of 25 years with Punjab State Power Corporation Ltd (PSPCL). Punjab grid was integrated in FY19. The credit risk profile of most of the Karnataka and Punjab Discoms is moderate leading to delay in realization of payments by UPCL for sale of power to them. During FY19, the company had to write-off the receivables of Rs.110 Cr from Punjab Discoms. However, during the same period, the company was able to receive timely payments from Karnataka discoms which led to decrease in receivable days from 168 in FY18 to 97 in FY19. Increasing debt level of the Adani Group: The overall debt levels of the Adani Group has been increasing on account of new initiatives as well inorganic growth undertaken across businesses by the Group, given the significantly capital intensive infrastructure nature and long gestation period of most of these businesses. However, at an overall Group level, the debt is adequately covered through committed cash-flows across the strong businesses. For the equity requirements of new businesses and support requirements for existing businesses, the promoters largely rely on dividends from strong businesses and raising additional funds through pledge of their equity shares in the listed companies. Servicing of some of this debt largely depends on refinancing options. ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA The rating is for the Financial Bank Guarantee of Rs.210 Cr issued in favour of project lenders of Udupi Power Corporation Ltd. in lieu of Debt Service Repayment Account maintenance (DSRA). DSRA requirement is 4 months rolling interest & principal payable. It is further clarified that this is not a rating for the project loan availed by the Company from its project lenders. BWR has assigned a CE rating, deriving credit enhancement from the security cover of 1.5x by the pledge of shares of ATL which will cover 75% of the bank guarantee amount, besides 25% cash margin. RATING SENSITIVITIES Positive: Improvement in operating performance of the company with improvement in ​ coverage indicators will be credit positive. Negative: Decline in coverage indicators from current level with inadequate cashflows ​ leading to recourse to DSRA arrangement will be credit negative. LIQUIDITY POSITION - Adequate As on March 31, 2019, UPCL has cash and bank balance of Rs.253 Cr as compared to the repayment obligation of Rs.222 Cr. Further, the rated facility is secured by listed equity shares of ATL with the security cover of 1.5x for the 75% of the BG amount and balance 25% by cash margin. COMPANY PROFILE Incorporated in February 1996, Udupi Power Corporation Ltd. (UPCL) is a 100% subsidiary of Adani Power Ltd. (APL) since 2015. UPCL was previously owned by Lanco Infratech Ltd. (a Lanco group company). The company has set up and operates a 1,200 MW (2X600 MW) imported coal based www.brickworkratings.com Page 3 of 6 ​ ​ ​ power project in Udupi district of Karnataka. Ownership of the company changed from Lanco group to Adani Group, in 2015. The power project of UPCL is fully operational and achieved Commercial Operation (COD) for Unit I on November 11, 2010 and for Unit II on August 19, 2012. Credit Enhancement Provider: Adani Transmission Ltd. (ATL): Adani Transmission Ltd (ATL), incorporated in 2015, is the flagship company of Adani Group in the power transmission sector. The shareholding is held 74.92% by the Promoters and promoter group and 25% by the general public. It is one of the largest private-sector participants in India’s power transmission chain. ATL is a holding company created to house the power transmission and distribution business of Adani group. Through its SPVs and subsidiaries, ATL owns, operates and maintains 14738 Ckt Kms of transmission lines ranging from 220 KV to 765 KV with a power transformation capacity of more than 23000 MVA. During 2018, the company also ventured into power distribution business by acquiring Mumbai’s generation, transmission and distribution business which is housed under a 100% subsidiary of ATL - Adani Electricity Mumbai Ltd. CMP of its shares is Rs. 332 (52 weeks H/L is Rs. 366 and Rs. 180 respectively). As on Dece​ mber 31, 2019, promoters are holding 74.75% of shares of which 35.29% are pledged. KEY FINANCIAL INDICATORS (in INR Crs) – Issuer - UPCL Rs. Cr FY18 FY19 Total Income 2942 3511 EBITDA 906 993 Net Profit 27 126 Total Debt 4574 4180 Networth 1752 1877 Total Debt to Tangible Networth 2.6 2.2 Current Ratio 0.8 1.4 FINANCIAL INDICATORS – CREDIT ENHANCEMENT PROVIDER Adani Transmission Ltd. (ATL) – Consolidated Key Parameters Units FY18 FY19 1HFY20 Result Type Audited Audited Unaudited Operating Income Rs. Cr 3944.59 7305.64 5528.39 EBITDA Rs. Cr 2826.12 2779.60 2348.39 www.brickworkratings.com Page 4 of 6 ​ ​ ​ Net profit Rs. Cr 1142.94 559.20 444 Total Debt Rs. Cr 10428.34 20136.99 17791.43 Tangible Networth Rs. Cr 5735.71 6467.52 7687.95 Gearing Times 1.82 3.11 2.31 NON-COOPERATION WITH PREVIOUS RATING AGENCY IF ANY - NA RATING HISTORY Instrument S.No Current Rating (2020) /Facility Rating History Type Amount July April (Long Term/ Rating Sep 2019* ( Crs) 2019 2018 Short Term) ₹ BWR A- BWR A- BWR BWR A- Working Capital 1.