| Pipeline Infrastructure Limited | ||
| Rating reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the non-convertible debentures (NCDs) of Pipeline Infrastructure Ltd (PIL; a wholly owned subsidiary of India Infrastructure Trust [India Infra], an infrastructure investment trust [InvIT]). With effect from July 2018, PIL has taken over the East-West pipeline (EWP) from East West Pipeline Ltd on a going-concern basis.
The rating continues to reflect the favourable location of the EWP, expectation of stable cash flow backed by a long-term contract with Reliance Industries Ltd (RIL; ‘CRISIL AAA/Stable/CRISIL A1+’) and a comfortable financial risk profile. These strengths are partially offset by exposure to refinancing and operations and maintenance (O&M) risks.
EWP, a 1,480-kilometre (km) cross-country pipeline, is the sole pipeline connecting the gas-producing eastern coast to the western coast of India. It also connects key industrial clusters and is connected to the GAIL’s trunk and other pipelines.
PIL has entered into a pipeline usage agreement (PUA) with RIL, whereby the latter will contract a certain capacity of the pipeline for 20 years. The arrangement will ensure steady cash flow to PIL in case the actual revenue is lower, either on account of lower gas volume or tariff. RIL will be entitled to use unutilised capacity payments made under the PUA in future. RIL will also participate in upside sharing if the actual volume is higher than the contracted capacity.
The financial risk profile remains robust, with debt-to-value within 49% at consolidated India Infra debt, and a comfortable debt service coverage ratio (DSCR). The rating also takes into consideration the presence of a waterfall mechanism and a debt service reserve account (DSRA) equivalent to three months of debt obligation. |
Analytical Approach CRISIL Ratings has considered the standalone credit risk profile of PIL. As the company is a 100% subsidiary of India Infra (an InvIT), CRISIL Ratings has factored in the regulatory requirements for the special purpose vehicles (SPVs) of an InvIT, including mandatory distribution of 90% of its net distributable cash (post servicing of debt) to the InvIT. Also, the consolidated borrowing of the InvIT is expected to remain within 49% of the value of its assets. |
Key Rating Drivers & Detailed Description Strengths Favourable location of the EWP The EWP is the sole pipeline connecting the gas producing eastern coast to the western coast of India, extending from Kakinada in Andhra Pradesh to Bharuch in Gujarat. It supplies gas to key industrial clusters and to customers in the fertiliser, power, iron and steel, petrochemicals, and refining sectors. The pipeline is also connected to pipelines of other operators, such as GAIL and Gujarat State Petronet Ltd, for onward delivery of gas to other parts of India.
Stable cash flow from the EWP Overall cash flow benefits from the presence of a 20-year contract with RIL for contracted capacity payments and the strong credit risk profile of the counterparty. The EWP is critical for RIL given the significant investments being undertaken for ramping up gas volume in the Krishna-Godavari (KG)-D6 fields. The arrangement will smoothen out cash flow in case the actual gas volume is lower or tariff rates are reduced.
Cash flow generated were moderate during fiscal 2021 on account of lower gas volume transported. The situation has, however, improved over the nine months through fiscal 2022 on account of increased production from the KG-D6 fields. While PIL transported 11.99 million metric standard cubic metric per day (mmscmd) of gas in fiscal 2021, volume improved to 21.44 mmscmd over the nine months through fiscal 2022. Over the medium term, volume could further ramp up, with increase in output expected from the investments undertaken by RIL and the other operators for extracting gas from the KG basin. Furthermore, volume is supported by the pipeline being used by other operators, such as Oil and Natural Gas Corporation, and for transporting re-gasified liquefied natural gas.
Comfortable financial risk profile Cash accrual is stable and the DSCR strong, and there is a three-month DSRA. The debt-to-value at the consolidated India Infra level is also limited to 49% (though it can be increased to 70% subject to fulfilment of certain prescribed conditions), thereby restricting the debt that can be availed by PIL. Healthy cash generation by PIL will ensure a comfortable DSCR. The rating is also supported by financial covenants with minimum interest coverage of 2.0 times for the PIL NCDs.
The company also has a well-defined waterfall payment structure, wherein a preference for payment of interest on external debentures is to be given before payments are made to the India Infra shareholder debt, investment manager, and unitholders. This lends additional support to the financial risk profile. Further, PIL will receive cash flow from RIL at the beginning of the quarter, whereas interest repayment at PIL is scheduled at the end of each quarter, providing a cushion of three months. The external debentures also have a bullet repayment after five years.
The investors are also protected in case of delay in payments by RIL. In such a scenario, India Infra will exercise an enforcement option, which will require RIL to either purchase the NCDs for the enforcement amount or invest the amount in PIL, with proceeds to be utilised to redeem the rated NCDs. The enforcement option will be consummated on the 158th day from the beginning of the quarter where payment from RIL has been missed.
Weaknesses: Moderate refinancing risks The debt has a bullet payment at the end of a five-year tenure and exposes the company to moderate refinancing risk. However, a 15-year tenure for underlying assets extending beyond the repayment tenure should help comfortably refinance the bullet repayment. Furthermore, India Infra’s investment manager has to furnish a firm commitment letter for refinancing the outstanding NCDs a month before their maturity.
PIL is expected to prudently refinance the maturing debt and continue to maintain its healthy DSCR over the medium term.
Moderate O&M risks O&M for the pipeline will be undertaken by a contractor, which is a 50:50 joint venture (JV) between the RIL group and the InvIT sponsor. O&M expenses form a significant proportion of the revenue. However, any escalation in expenses will be further funded by RIL, except for system usage gas, which will have to be funded out of the SPV’s revenue. |
Liquidity Superior The stable cash flow is expected to amply cover the debt obligation over the medium term, leading to a healthy DSCR (more than 2 times after excluding subordinated debt from the shareholders) over the tenure of the debt (five years). Furthermore, the long life of the underlying assets, extending well beyond the debt tenure, should aid in refinancing bullet repayments at favourable terms. The three-month DSRA being maintained also supports liquidity. |
Outlook Stable CRISIL Rating believes PIL will benefit from the improvement in gas volume transported as well as derive comfort from the long-term pipeline usage agreement executed with a strong counterparty. |
Rating Sensitivity factors Downward factors
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About the Company PIL, a wholly owned subsidiary of India Infra, has taken over the EWP from East West Pipeline Ltd on a going-concern basis.
India Infra is promoted by an indirect subsidiary of Brookfield Asset Management (BAM): Rapid Holdings 2 Pte Ltd (the sponsor). The O&M contractor is a 50:50 JV of the sponsor and the Reliance group. IDBI Trusteeship Services Ltd is the debenture trustee. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Criteria Details
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