Analytical Approach: Ind-Ra has assessed VRPL’s strong operational, legal and strategic linkages with its sponsor EDF Renouvelables (EDF R; 100% owned by EDF S.A.; Fitch Ratings Ltd: Issuer Default Rating: ‘A-’/ Negative) to arrive at the rating. The agency expects the sponsor to support the project if required, given the unconditional and irrevocable post-default guarantee extended by the former towards the rated facility. The project is owned by EDF R and its Indian joint venture partner SITAC Group in 9:1 proportion.
The project profile draws strength from its parentage and a firm power purchase agreement (PPA) with Gujarat Urja Vikas Nigam Limited (GUVNL). However, the lack of any operational history and inherent variability of the wind resource constrain the rating.
KEY RATING DRIVERS
Strong Parentage: EDF S.A., owned by the government of France, is one of the largest producers of electricity in the world, with a total power generation capacity of 89GW, including 12.6GW renewable assets under operations and 5.04GW of renewable assets under construction, as on 31 December 2019. EDF R is the subsidiary floated by EDF S.A. exclusively for undertaking renewables project across the globe.
In India, EDF R has an operational wind capacity of 269MWDC and an under-construction capacity of 300MWDC. The company has also forayed into solar capacity installation in India with an 207MWDC operational capacity and an under-construction capacity of 1,616MWDC. The considerable experience of the sponsors in operating large-sized and complex assets provides strength to the rating. Additionally, the main sponsor’s policy of maintaining surplus cash, which stood at INR196 million as of 30 June 2020, to address any contingencies provides comfort to the rating. However, Ind-Ra expects timely support from EDF R to VRPL in case of a shortfall, given its strategic nature.
Strong Linkages with Sponsor: Given the strategic nature of the Indian renewable market, the sponsor has extended a corporate guarantee to raise initial funding. Additionally, the sponsor is well represented in the project’s board providing adequate supervision. The sponsor is fully owned by EDF S.A. and the accounts of the sponsor are fully consolidated into the ultimate parent’s financials.
EDF S.A. has a track record of supporting its other energy companies, when needed. The management has confirmed that any support from the sponsor group will be subordinated to the senior facilities.
Low Counterparty Risk: VRPL has a fixed-price PPA for 25 years from the commercial operations date with GUVNL for the entire energy produced. GUVNL is a strong counterparty and has a reasonable track record of payments to power producers – within 30 days from the date of invoices – as observed for Ind-Ra rated peers. The PPA also specifies the creation of an LC-backed payment security mechanism equivalent to one month’s billing amount; however, the same was yet to be created, as of 31 July 2020.
The distribution utilities under GUVNL were profitable in FY19 and have the best financial profiles among the state-owned distribution companies in India. GUVNL’s gap between the average revenue realised and the average cost of supply reduced to INR0.03/kWh in FY19 (FY18: INR0.07/kWh) and payable days remained nil over FY17-FY19. The regular receipts of payments from GUVNL, improving average cost of supply and average revenue realised gap, consistent revenue growth and nil payable days favour GUVNL’s ratings over its peer discoms.
Liquidity Indicator- Adequate: VRPL had cash and cash equivalents of INR196 million, as of 30 June 2020, which is equivalent to seven months of LC interest obligations, and timely receipt of payments within 10 days of raising invoices from GUVNL. The LC facility agreement does not stipulate any requirement for the creation of liquidity reserves, although the facility is guaranteed by the sponsor.
Lack of Operational Track Record: The project has an operational track record of only seven months since its commissioning on 19 December 2019. The performance of wind power projects is susceptible to technological uncertainties, primarily in the initial operational period of operations. Given that the sensitivity of cash flows of a wind power project to the plant load factor is high, these risks can impair the debt-servicing cushions available for wind projects.
A healthy plant load factor generation track record, in line with Ind-Ra’s expectations, will remain a key rating sensitivity factor. Ind-Ra expects VRPL to operate above the P75 value of 42.66% over a longer time frame post stabilisation, taking cues from the superior operational performance post the initial stabilisation period for above 100m hub height projects from the top three wind turbine generators (WTGs) suppliers. Any underperformance from these operational assumptions can lead to a rating downgrade.
Moderate Refinancing Risk: The project is funded in the form of purchases and capex made by availing the LC facility, backed by the corporate guarantee from the sponsor, which has a tenor of 36 months expiring at different tenors commencing from September 2021 and ending in April 2023. The management intends to refinance the LC facility well before the expiry of the first LC (maturing in September 2021) and enter into a long-term project finance facility. Surplus cash flows generated till the LC maturity will be utilised for reducing the debt outstanding and the creation of adequate liquidity reserves. Ind-Ra also believes that the timely takeover of the facility by any player will remain a key rating monitorable.
Debt Features: The LC has been issued by Barclays Bank Plc –India Branch (lender; ‘IND A1+’) with the corporate guarantee as a backstop. The guarantee document states that the debt would be paid on demand. The tenor of the LC facility is restricted to maturity of 36 months. As per Ind-Ra’s discussion with the lender, the counter guarantee can be invoked even before the LC becomes due for payment. The counter guarantee states that the payment will be made by the guarantors within seven days upon receiving the demand from the lender.
VRPL has been using the LCs to purchase WTGs for the construction of its 100MW wind power project. The guarantee delineates that the guarantors would honour the obligations even if they undergo any absorption/amalgamation/reconstitution/merger/consolidation/insolvency. The guarantee further states that the guarantor will not exercise any right of subrogation, or any other right having similar effects, against VRPL and will make any payment made pursuant to this guarantee until the lender has paid its entire debt pursuant to the facilities. According to the guarantee, the guarantor will settle the obligations on demand from the lender and any deviation from this mechanism can affect the ratings negatively.
Also, cross-default provisions are applicable only for promoter funding of other two EDF R projects, backed by EDF R’s corporate guarantee with no recourse to project cash flows. The management has confirmed that EDF R will repay these loans, if required, making VRPL immune to any impact of cross-default provisions.
Moderate Technology and Operating Risks: Given that VRPL is a wind power project, it is exposed to the revenue risks arising from the volatility in wind availability. Ind-Ra considers the wind turbine technology employed by VRPL to be standard and proven.
M/s Vestas Wind Technology India is the WTG supply, erection and commissioning and operations and maintenance contractor for the project. The operations and maintenance contract is a fixed-price contract for 20 years, with defined indexation. The company employs Vestas Wind Technology’s WTGs with a hub height as well as rotor diameter of 120m, resulting in significantly better power generation than its older counterparts. Over the seven months ended June 2020, the average monthly grid and machine availabilities were below average and yet to achieve stability.
Moderate Supply Risk: As with any wind farm, the project’s revenue and operating cash flow are directly correlated with wind speed and, thus, the accuracy of the wind assessment studies and energy production forecasts. There is always a risk stemming from low speeds that may impact cash flows available for debt service obligations.
Risks Constraining the Project Rating: The rating is constrained by the inherent generation risks in a renewable project; interest rate risks; counterparty risk and diversification risks, as the entire capacity is situated at the same location.
Negative: Future developments that could, individually or collectively, lead to a negative rating action are:
– a weakening of the linkages with the sponsor
– operational performance below P90 in FY21 and FY22
– project life coverage ratio falling below 1.20x on actual generation basis
– significant weakening of the parent’s credit profile
– any increase in the receivables period beyond 45 days
Positive: Future developments that could, individually or collectively, lead to a positive rating action are:
– operational and financial performance above Ind-Ra’s base case estimates for more than two consecutive years
– sustained project life coverage ratio above 1.30x on actual generation basis