Contrary to market opinion, credit rating agency ICRA sees aggressive bidding for new City Gas Distribution (CGD) licenses as a credit negative over the long term for the bid winners.
K. Ravichandran, Senior Vice-President and Co-Head, Corporate Ratings, ICRA, said “While the industry outlook has improved, the aggressive bids being witnessed are a cause for concern. Most of the bid winners in the nine GAs which have been granted authorization in the bid round four have bid at the lowest possible Network and Compression charges of Rs 0.01/mmbtu and 0.01 Rs/kg respectively for all the 25 years of network exclusivity. This exposes the bid winners to higher business risks once the marketing exclusivity expires after first five years.”
Further, in case of a tie in tariff bid by players, the winner is selected based on the value of bid bond submitted. Once the company which submits the highest bid bond wins the bid, as per guidelines, it has to submit a performance bank guarantee (PBG) valid for five years equivalent to four times the value of the bid bond (which has to be renewed every five years till the end of authorization period i.e. 25 years). As a result of the higher competition for some GAs, the PBGs required to be submitted as per the authorization letters in the case of Bid-Round 4 bidders are significantly higher than earlier rounds. ICRA believes that, while the willingness to submit a large PBG indicates the higher commitment of the players to carry out operations, this exposes the players to large contingent liabilities (several times the net-worth of the concerned entities), besides guarantee charges and margin money for bank facilities.
The Supreme Court’s verdict granting uniform allocation of available domestic gas in November 2013 and other positive industry developments over the last 12-18 months, would benefit the CGD players especially who had no allocation of domestic gas at that point in time, says ICRA. GoI’s stance on prioritization of gas allocation policy to the CNG and PNG (domestic) segments would result in CGD players having 100 % domestic gas for their sales volumes in these two segments.
These developments have resulted in a renewed interest in the PNGRB bidding rounds conducted during FY15. PNGRB received a total of 44 bids for grant of Authorisation for development of CGD networks in 9 Geographical Areas (Gas) out of 14 GAs covered under 4th round CGD bidding. The 5th round of bidding has also seen keen interest from players.
Ravichandran added, “Large contingent liabilities can negatively impact the credit profile of the players, , if they were to slip up on meeting minimum work program me (MWP) stipulated by PNGRB for each city and unable to meet the service standards, as the regulator can encash the bank guarantee. Moreover, competition from third party marketers can emanate over the longer term when domestic gas availability improves and open access regulations reach a mature stage, as the minimal bid tariffs will be applicable for the entire license period of 25 years. While the risk is not material currently, in case gas availability were to improve significantly, say over the long term, third-party marketers could present a considerable threat to CGD companies quoting low tariffs. Risks to the incumbents can further increase if the GoI were to allow CNG marketing, by companies holding licenses to retail auto fuels (such as PSU OMCs and private retailers), independent of the CGD network which is being considered.”