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India Ratings and Research (Ind-Ra) has revised its Outlook for energy infrastructure companies to Negative from Stable for FY21, as the COVID-19-driven lockdown is likely to affect the liquidity level in all companies across the power sector value chain. Ind-Ra further believes that the power generation companies (gencos) will face an elevated counterparty risk, given the steep fall in demand; under recoveries compared to cost; possible lower subsidy payout by states, and a weakening economic outlook.
Against the background of gloomy industrial demand and government’s limited resources, liquidity will be a critical driver for energy infrastructure special purpose vehicles (SPVs) till the effects of the lockdown persists and Ind-Ra will continue to take rating actions based on liquidity buffers available with all energy infrastructure SPVs till the time risks subsist. Though the agency believes that the long-term risk profile of the majority of rated companies is unlikely to be affected due to the presence of long-term power purchase agreements, Ind-Ra expects liquidity to be the key influencer for rating actions in the interim. The agency believes cash flow stress until May 2020 can be managed through debt deferment options notified by the Reserve Bank of India on 27 March 2020, should the projects avail it. Ind-Ra will assess the planned liquidity infusion scheme for distribution companies (discoms), as it will be the most important factor in counterparty risk analysis for generationand transmission companies.
Uncertain Revenues to Deplete Liquidity: Ind-Ra may take rating actions on SPVs that do not have adequate liquidity to handle the expected delay in tariff payments from discoms, commensurate with their rating levels. Rating downgrades are likely to increase since there is uncertainty on the timing of payments from discoms. Constrained states’ fiscal leeway also limits the timely transfer of subsidies and aggravates the cash flow problems of discoms. Thus, even after considering the debt deferment provisions, the agency believes there could be downward rating actions. Added risk on the deferment is that structuring of interest servicing at the end of moratorium period and any adverse stipulation by even a minority of lenders could jeopardise stability. On the other hand, attempts to invoke any contractual provision (like force majeure clauses) to not make payments to gencos may cause steep downward rating revisions, since this might lead to regulatory proceedings and elongated period for tariff recovery due to prolonged litigations. Funding plans such as enhanced working capital limits is a monitorable.
Liquidity Key to Manage Cash Flow Stress: Projects in investment grade in the agency’s rated universe in energy infrastructure segment generally have three-to-six months’ liquidity, including unencumbered cash (at the disposal of lenders), debt reserves and unutilised working capital limits. Depending on the payment behaviour and any the visibility on the future trend of payments from the counterparty, Ind-Ra will evaluate the available liquidity to handle the forthcoming debt service commitments. Wherever there is a lack of clarity on future payments from discoms, Ind-Ra will assume cash flows on a conservative basis to project the liquidity levels. While group-level liquidity (along with any publicly declared policies on supporting projects under distress) will be considered in the analysis, very low weightage will be provided to liquidity outside of the SPV, except for free cash available at the sponsor level. Ind-Ra believes that it will be difficult to repatriate funds from other affiliate companies having debt of their own, given the lenders may not permit such movement of funds owing to uncertainties at all levels. Ind-Ra hasn’t come across any significant operational hardships for the rated SPVs so far, however, a prolonged lockdown might impact operations sporadically.
Expected Rating Impact on Energy Infrastructure SPVs
|Risk Driver||Fallout Due to COVID-19 caused Lockdown||Impact on Ratings|
|Counterparty Risk||· Fall in revenue of discoms · Higher uncertainty in subsidy receipts by discoms||High|
|Revenue Risk||· Discoms invoking force majeure clause to stop scheduling energy or stop payments to gencos · Higher cost power suppliers (i.e. plants low in merit order) at higher risk · Possibility of grid curtailment for renewable projects due to low demand, as wind season starts from April · Group captive companies may have lower billing and recovery in April – May 2020, because of the lockdown of industrial and commercial centres. Banking facility and option to sell to discoms any energy that is unallocated to group captive consumers may partially mitigate the risks.||Moderate-High|
|Operational Risk||· Constraints in movement of material and men · Availability of adequate operations and maintenance personnel · Coal logistics and advance payment for coal may be challenging||Low-Moderate|
|Construction Risk||· Stoppage of works and higher risks in men and material availability on resumption of construction activities · Constraints in procurement and logistics for equipment · Force majeure provisions are available for delay in scheduled commercial operations date · Availability of funds for equity infusion and return from equity investments will be under pressure||Low-Moderate|
Demand Reduction Hurts Discoms; Stress May Be Prolonged: Discoms are likely to experience acute cash flow stress owing to falling consumption in most regions and delayed tariff payment by end consumers. In the tariff structure for end consumers, the fixed charges are generally much lower than the fixed charges payable under the power purchase agreements signed with thermal power companies. Thus, discoms charging low fixed charges will experience higher under recoveries because the billing will fall commensurately with demand fall and recovery in billing might be slow given the downward revision in the agency’s GDP growth estimate for FY21. Further, the consequence of COVID-19 pandemic could lead to additional cash flow stress, as states’ funds may be prioritised elsewhere. Reportedly, discoms of six to seven states have sent notices to few generators invoking force majeure to stop paying fixed charges and the agency will continue to closely monitor the same for any ratings impact.
Many discoms have historically exhibited erratic behaviour on account of revenue under recoveries, delayed subsidy receipts and inefficient operations. Discoms have historically elongated the payment delays for state-owned gencos and transmission companies, which is likely to continue. Ind-Ra considers that projects exposed to central sector counterparties (Solar Energy Corporation of India and NTPC Limited (IND AAA/Stable)), may be better able to withstand the headwinds, given the diversified counterparties for these entities, central assistance and better ability to manage funds.
The Ministry of Power (MoP) and Ministry of New and Renewable Energy have taken several actions to address the current situation.
Government Notifications Relating to Energy Infrastructure
|Power sector related government actions||Impact on energy infrastructure companies|
|Liquidity infusion scheme for discom is planned and details are awaited||Impact will be evaluated on release of detailed scheme. This could play the most important role in credit profile assessment of energy infrastructure companies.|
|Clarification that there is no moratorium in payment dues from discoms to gencos and transmission companies||Positive|
|Declaring gencos and transmission companies as essential services||Positive|
|Reiteration that renewable energy needs to be operated on must-run basis and tariff payments are to be made without any delays. Any curtailment but for grid security reason would lead to considering deemed generation for affected companies||Positive|
|Letter of credit is required to the extent of 50% of cost of power instead of entire cost of power||Negative to Neutral; discoms are likely to review their own cash flow position when deciding to meet their debt service, power purchase cost and other operating expenses. These measures are unlikely to change discom behaviour significantly from their actions based on cash flow situation. Given the current critical situation, the change in letter of credit requirement and late payment surcharge will ensure continuous commercial operations of all entities, rather than provide a relief for discoms.|
|Late payment surcharge will be reduced to 12% from 18% for payments which become overdue from 24 March 2020 and 30 June 2020.|
Advance Payments for Coal a Stress for Thermal Projects: Liquidity issues can severely impact coal availability for thermal plants, given that payments for both coal procurement and logistics (Indian Railways) have to be made in advance. Reduced coal availability can affect project’s availability, further posing risk on fixed tariff payment (permanent loss of revenue and not just liquidity issue) for availability-based projects (subject to litigation). A speedy policy implementation in this regard is a key to conserve credit profile of these vulnerable projects. The agency believes, additional working capital limits including trade finance facilities and reduction in working capital margin could ease the coal purchase process.