FINANCIAL ANALYSIS A. Introduction

Transcription

1 Green Energy Corridor and Grid Strengthening Project (RRP IND 44426) FINANCIAL ANALYSIS A. Introduction 1. The proposed Green Energy Corridor and Grid Strengthening Project funds (i) a portion of India s Green Energy Corridor initiative to facilitate the transfer of renewable energy, and (ii) four high-voltage direct current terminals as part of increased interregional connectivity between India s western and southern regional grids. Asian Development Bank (ADB) funding consists of a $500 million sovereign-guaranteed loan to Power Grid Corporation of India Limited (POWERGRID). B. Methodology and Major Assumptions 2. Financial models. The project s financial analysis includes a project-level model and a corporate-level model. The project-level model takes detailed cost estimates for the specific project-funded assets, including the funding sources, and projects financial revenues generated from, and costs incurred related to, these assets. The corporate-level model evaluates POWERGRID s 3 year historical performance and projects results for 15 years. 3. Tariff-based revenue. POWERGRID comprises a portfolio of primarily regulated transmission assets, with each capitalized asset earning a tariff as defined by India s Central Electricity Regulatory Commission (CERC), the regulator. As a regulated asset, the project therefore benefits from both predictable revenue streams commonly found in project finance transactions, as well as from the strength of POWERGRID s overall balance sheet. POWERGRID may, in future years, undertake transmission projects that require bidding on a competitive basis. However, these projects would be implemented via subsidiaries and/or joint-venture companies (and this analysis makes no assumptions in respect to future POWERGRID activities). C. Project-Level Analysis and Risk Assessment 4. Project costs. The project s required capital investment is estimated in Indian rupees using mid-2015 price levels. Capital costs were estimated based on recent procurement data and market sources. Costs include civil works, equipment, land development, environment and social mitigation costs, project management cost, and taxes. Incremental operation and maintenance (O&M) costs are computed based on regulatory norms. 5. Financial internal rate of return. The project s financial viability was examined by comparing the incremental costs and benefits. The financial internal rate of return (FIRR) is calculated at 5.76% in real terms (10.72% on a nominal basis), which compares favorably with the estimated weighted average of cost of capital (WACC) value of 3.66% in real terms (7.78% on a nominal basis), thus substantiating the project s financial viability Project risk assessment. POWERGRID s project-level returns are based on the return on equity (ROE) and capital cost allowed by CERC regulations, therefore a reduction of the ROE in the CERC tariff guidelines or disallowance of any project cost component could negatively affect returns. However, the risk is considered limited due to National Tariff Policy provisions that specify a full cost pass-through, as well as the regulator s past record. 2 1 The WACC is computed based on a pretax cost of capital of the ADB sovereign loan of 3.5%, applicable rates for other corporate loans, local bonds at 8.5%, and a cost of equity at 15.5%. 2 National Tariff Policy provision 5.3 (a) to (h) stipulates performance-based cost of service regulation that assures adequate return on investment and complete pass-through of costs.

2 2 7. Sensitivity analysis. Variables considered for the sensitivity analysis are (i) 20% increase in capital costs, (ii) 20% increase in O&M costs, (iii) 1-year completion delay and withdrawal of the 0.5% incentive for timely completion, and (iv) 1% reduction in ROE. Increases in capital and O&M costs and completion delays have a marginal impact on the FIRR, as these are passed through in tariffs, though they would have minor cash flow implications, since tariff adjustments are made post facto. The FIRR is sensitive to changes in the ROE or incentive elements that directly affect profitability. Even in a worst-case scenario, the lowest FIRR remains 5.21% and compares favorably with the estimated WACC of 3.66%, further substantiating the project s financial viability (Table 1). Table 1: Project-Level Sensitivity Analysis Item FIRR a (%) FNPV a (Rs million) Base case ,722.4 Scenario A: Base case plus 20% increase in capital cost ,239.7 Scenario B: Scenario A plus 20% increase O&M costs ,585.9 Scenario C: Scenario B plus 1-year completion delay, no incentive for timely completion ,786.7 Scenario D: Scenario C plus 1% reduction in return on equity ,743.2 FIRR = financial rate of return, FNPV = financial net present value, O&M = operation and maintenance. a Calculated in real terms. Source: Asian Development Bank estimates. D. Corporate-Level Financial Analysis and Risk Assessment 8. Historical corporate performance. POWERGRID s revenues increased at a compound annual growth rate of 15.5% from Rs133 billion in 2013 to Rs178 billion in 2015, while total assets increased from Rs1,111 billion in 2013 to Rs1,583 billion in POWERGRID is implementing several large projects, and revenues will increase as projects are completed. Since POWERGRID receives both full recovery of allowed project costs and a defined ROE, its earnings before interest, tax, depreciation, and amortization margin has remained above 85%, and the net profit margin has been about 30% in each of the past three financial years. Table 2: Historical Audited Corporate Financial Indicators (Rs billion) Item (Year Ended 31 March) Total Assets 1, , ,583.0 Total Liabilities (without Shareholder's Equity) , ,201.3 Total Shareholder s Equity Total Revenue EBITDA FCF a Year Average EBITDA Margin (%) DSCR b 1.7x 1.6x 2.0x 1.8x Percent of Cash from Internal Sources (%) Current FCF to DSR c 1.6x 1.6x 1.5x 1.6x Average FCF to DSR 1.7x 1.4x 1.6x 1.6x Debt-to-Equity Ratio 2.4:1 2.2:1 2.3:1 2.3:1 ADB = Asian Development Bank, DSCR = debt service coverage ratio, DSR = debt service requirement, EBITDA = earnings before interest, taxes, depreciation, and amortization, FCF = free cash flows. a FCF = the sum of all revenues less the sum of all operating expenses including finance charges. b DSCR = earnings before interest, tax, and depreciation divided by the sum of (i) principal repayments and (ii) interest and finance charges, net of amounts charged during construction. c DSR = aggregate of all repayments and interest on debt, net of capitalized interest. Source: POWERGRID; ADB analysis. 9. POWERGRID maintains a corporate debt-to-equity ratio of approximately 70:30, or 2.3

3 3 times, since CERC regulations allow POWERGRID to earn the ROE on a maximum 30% of capital costs. Projects are financed under a similar debt-to-equity ratio. POWERGRID has been able to finance at least 20% of capital expenditure from internal sources, and the debt service coverage ratio (DSCR) has remained above 1.5 times in the past three years. Free cash flow to debt service requirement has been 1.6 times on average for the past three years. 10. Projected corporate performance. POWERGRID s projected financial indicators from are in Table 3. Extended forecasts through 2030 are in Table 5. Its capital investment plans are forecast to increase total revenue from Rs177.8 billion in 2015 to Rs422.1 billion by Table 3: Projected Corporate Financial Indicators (Rs billion) Item (Year Ended 31 March) to 2030 Total Assets 1, , , , ,543.1 See Table 5 Total Liabilities 1, , , , ,807.9 Total Shareholder s Equity Total Revenue EBITDA FCF year Average EBITDA Margin (%) DSCR 2.4x 2.2x 2.2x 2.1x 2.3x 2.4x Percent of Cash from Internal Sources (%) Current FCF to DSR 1.5x 1.3x 1.7x 1.6x 1.5x 1.7x Average FCF to DSR 1.4x 1.5x 1.6x 1.6x 1.5x 1.7x Debt-to-Equity Ratio 2.3:1 2.3:1 2.2:1 2.1:1 1.9:1 1.3:1 ADB = Asian Development Bank, DSCR = debt service coverage ratio, DSR = debt service requirement, EBITDA = earnings before interest, taxes, depreciation, and amortization, FCF = free cash flows. Source: ADB estimates. 11. Based on POWERGRID s plans, capital expenditure is expected to reach a maximum annual amount of Rs291 billion in 2019, financed by a combination of debt and equity in a debt-to-equity ratio of about 70:30, or 2.3 times. Cumulative capital expenditure from 2016 to 2020 is Rs1,016.6 billion, after which projects are completed and no major expenditures are planned; liabilities also start reducing after reaching a maximum of Rs1,807.9 billion in During the loan term, POWERGRID s average DSCR is calculated to be 2.4 times, and the minimum is 2.0 times. POWERGRID is able to finance at least 20% and on average 51% of capital expenditure from internal sources from 2016 to These projections indicate that POWERGRID s financial position will remain strong during peak capital expenditure and with maximum long-term liabilities. 13. Sources of financing. POWERGRID is expected to have continued access to several financing sources, including domestic and international banks, capital markets, and multilateral and other development financial institutions. In the financial projections, it is assumed that POWERGRID will maintain a debt-to-equity ratio of about 70:30 and that foreign currency debt will represent a maximum 33% of debt financing and 23% of total financing. 14. Foreign currency debt. CERC regulations allow POWERGRID to hedge foreign exchange exposure based on its own approved hedging policy or recover foreign exchange rate variations from its customers without further regulatory approval. These variations are calculated and collected from customers on a quarterly basis after projects are completed. 15. Corporate-level risk assessment. Risk factors that may impact future corporate-level

4 4 financial performance, and corresponding risk mitigators, are described and assessed in the Risk Assessment and Risk Management Plan (accessible in the Linked Documents in Appendix 2). E. Sensitivity Analysis 16. Sensitivity analyses determined the impact on compliance with financial covenants under certain scenarios that represent potential risks, such as delays that could prevent POWERGRID from achieving the incentive ROE for timely completion, or cost overruns that are not ultimately regulator-approved. Other scenarios include a reduction in the tariff-defined ROE rate, non-payment of receivables, and foreign exchange and interest rate variations. 17. The sensitivity analysis shows that even in a worst-case scenario, with a combination of delays, currency depreciation and regulatory changes, the DSCR remains above 1.0. Moreover, given the tariff s cost-recovery nature, scenarios such as currency depreciation, interest rate increases, operating cost increases, and approved cost overruns have a minimal impact on key financial ratios and covenants. POWERGRID s collection record with customers has been robust, with average accounts receivable representing less than 11% of annual revenue and overdue accounts representing less than 2% in the past three years. While this is expected to continue, scenarios were considered where the average accounts receivable increases to 90 days, or a customer with 10% of revenue defaults on 50% of amounts due (and POWERGRID is unable to recover this amount). In this case, the DSCR remains above 1.0. A summary of the analyses performed on key financial covenants is in Table 4. Scenarios Table 4: Financial Ratios Sensitivities Minimum DSCR Key Financial Ratios Average DSCR Maximum Debt-to- EBITDA Cash from Internal Sources (%) (Minimum) Current FCF:DSR a (Minimum) Average FCF:DSR b Maximum Debt:Equity Ratio Base case scenario 2.1x 2.4x 4.6x x 1.4x 2.3:1 Delays and no incentive ROE c 2.1x 2.4x 4.8x x 1.4x 2.4:1 20% project cost overrun d 2.0x 2.4x 4.7x x 1.4x 2.3:1 1% reduction in tariff ROE starting x 2.4x 4.6x x 1.4x 2.3:1 Tariff O&M escalation lowered to 1% in 2.1x 2.4x 4.6x x 1.4x 2.3: e 5% (net) annual currency depreciation 2.1x 2.4x 4.6x x 1.4x 2.3:1 1% increase in LIBOR throughout 2.1x 2.4x 4.6x x 1.4x 2.3:1 1% increase in Indian rupee rates 2.0x 2.4x 4.5x x 1.3x 2.3:1 throughout Increase of receivables (from 45 to x 2.3x 4.6x x 1.3x 2.3:1 days) Default of largest customer f 1.9x 2.2x 5.2x x 1.2x 2.4:1 Worst case scenario g 2.0x 2.3x 4.8x x 1.3x 2.4:1 ADB = Asian Development Bank, DSCR = debt service coverage ratio, DSR = debt service requirements, EBITDA = earnings before interest, taxes, depreciation, and amortization, FCF = free cash flows, LIBOR = London interbank offered rate, O&M = operation and maintenance, ROE = return on equity. a Ratio of FCF to DSR for the current financial year. b Ratio of FCF to DSR, in the case of an average of the previous, current, and following financial year. c Assumes the unlikely scenario where all future projects are delayed, and while costs overruns are approved by Central Electricity Regulatory Commission (CERC), all future revenues are delayed and ROE of 0.5% is not received. d Assumes the unlikely scenario where all future projects are delayed and CERC approves only 50% of cost overruns, while the remainder is not allowed for recovery via the tariff. e Current tariff regulations permit annual inflation rate of 3.32%. f Assumes largest customer currently represents approximately 10% of annual revenues. g One year delay in project completion, 5% (net) annual rupee depreciation and tariff ROE reduced by 1% from Source: ADB estimates.

5 5 Table 5: Historical ( ) and Projected ( ) Corporate-Level Financials Balance Sheet Actual Projected Fixed assets , , , , , , , , , , , , , , , , ,280.4 Other non-current assets Current assets , , , , , ,678.4 Total Assets 1, , , , , , , , , , , , , , , , , ,071.4 Current liabilities Other non-current liabilities Long-term debt (domestic) Long-term debt (foreign) Total long-term debt , , , , , , , , , Total Liabilities , , , , , , , , , , , , , , , , ,344.7 Share capital Reserves and surplus , , , , , , ,674.4 Total Shareholder s Equity , , , , , , , ,726.7 Income Statement Actual Projected Transmission sales Other income Revenue Total operating expenses EBITDA Finance costs Depreciation & amortization Taxes Net profit Transmission sales Cash Flow Statement Actual Projected Profit before tax Cash from operations Cash from investments (219.5) (263.8) (238.4) (201.3) (180.1) (276.3) (291.0) (67.9) 21.2 (15.1) 0.4 (14.8) (10.1) (29.1) (29.1) (24.8) (24.7) (24.6) Cash from financing (15.4) (102.3) (224.1) (176.0) (205.5) (207.2) (216.1) (212.5) (191.3) (187.5) (175.7) (168.5) Net change in cash (6.7) 27.6 (23.5) (3.2) Final cash balance , , , , ,548.7 Free cash flows Cash from internal sources Debt service requirement EBITDA = earnings before interest, taxes, depreciation, and amortization. Source: Asian Development Bank estimates.