"The negative outlook on Power Grid is consistent with the sovereign credit rating outlook, and reflects Power Grid's sensitivity to government intervention," S&P said.
It has assigned 'BBB-' long-term corporate credit rating to PGCIL, with a negative outlook. It has also assigned 'BBB-' to its proposed issue of up to $1 billion unsecured long-dated notes.
A largely national presence exposes Power Grid to the country and macroeconomic risk of India, it said. Moreover, it added, political considerations will continue to influence the ability and willingness of state-owned electricity boards—the company's key customers—to increase tariffs, limiting the improvement in their weak credit profiles.
Overall, however, PGCIL's stand-alone credit profile of 'BBB-' reflects the company's strong market position, S&P said. "We assess the company's business risk profile as 'satisfactory'. The company also plays the important role of planning for nationwide transmission infrastructure," it said. But, S&P said: "We could downgrade Power Grid if we lower the sovereign credit rating or ongoing government support declines."
The rating agency further noted: "We could revise the outlook to stable if we revise the sovereign rating outlook to stable and Power Grid's stand-alone credit profile is unchanged."
It said it did not expect Power Grid's "significant" financial risk profile to change materially over the next two to three years, and the company's aggressive capital expenditure plans toward expansion will continue to result in significant negative free operating cash flows.
S&P said the "extremely high" likelihood of extraordinary government support in the event of financial distress is based on Power Grid's "very strong" link with, and "critical role" to, the government.
"The rating on Power Grid reflects the company's near monopoly inter-state transmission business in India and a stable regulatory framework with a cost plus tariff mechanism on most existing projects," S&P's credit analyst Abhishek Dangra said.
He added: "We also believe there is an extremely high likelihood of extraordinary government support to Power Grid in the event of financial distress. The weak credit quality of the company's customers and the country and macroeconomic risk associated with India offset these strengths.