RGSEPL, which is sponsored by Hero Solar Energy Private Limited (HSEPL), operates a 43MW solar project in Madhya Pradesh. It has signed a 25-year PPA with MPPMCL at tariff of INR5.46/kWh. The project was awarded through tariff-based competitive bidding and was fully commissioned ahead of the stipulated date in the PPA. The project was implemented in a debt/equity ratio of 80:20.
The project recently got ‘IND BBB+’/Stable rating for its loan by India Ratings. Here is what the report had to say.
Plant Stabilised; Steady Revenue Receipts: The affirmation is based on Ind-Ra’s expectation of RGSEPL’s revenue generation likely to be adequate for meeting its debt service obligations, despite under performance in annual plant load factor (PLF) compared with annual P90 estimate. According to RGSEPL, low generation for several months after commissioning was due to variation in irradiance and stabilisation issues; however, generation has improved significantly during January-August 2018. Payments from Madhya Pradesh Power Management Company Limited (MPPMCL) are received within three months, although due date is 30 days from billing. A sustained PLF underperformance is a rating sensitivity.
Offtake Risk: The ratings reflect high revenue visibility through a long-term, fixed-price power purchase agreement (PPA) with MPPMCL for the entire capacity. As per the PPA, RGSEPL is allowed to sell power to third parties if MPPMCL refuses to buy power. If the tariff realised through third party sale is lower than INR5.46/kWh, the shortfall has to be met by MPPMCL. Also, for any quantum that could not be sold to a third party, MPPMCL has to compensate at INR5.46/kWh. The compensation indicated as a part of the PPA is unique and lends strength to cash flows in the event of contract repudiation by distribution companies.
Strong Sponsor: RGSEPL’s sponsor, Hero Solar Energy Private Limited (HSEPL), has a track record of supporting other subsidiary special purpose vehicles in times of distress to enable timely debt payments, averting the use of debt service reserve as a fall back. The agency expects sponsor support for RGSEPL in times of distress, especially arising from counterparty delays or generation shortfall; although not mentioned in the loan agreement. HSEPL has provided various undertakings, including retaining management control, to the lenders for RGSEPL.
HSEPL has commissioned over 500MW of renewable energy projects in the past broadly within the timeline. The sponsor is the solar energy arm of Clean Solar Power (Hiriyur) Private Limited (holding company of renewable energy assets of Hero group), which is owned by Hero Motorcorp Limited’s promoter group companies Bahadur Chand Investments Private Limited and Brijmohan Lal Om Prakash.
Operating Risk: The operations of a solar project are of low complexity. RGSEPL has signed a 25-year operations and maintenance contract with HSEPL. The contract features fixed price and fixed escalation. The assumed operation and maintenance costs are in line with those of Ind-Ra-rated peers.
Standard Technology; Short Operating Track Record: The project uses polysilicon solar panels, manufactured by Trina Changzhou Trina Solar Energy Company Limited, and single-axis trackers, supplied by Scorpius Trackers Private Limited. Moreover, it has a short operating track record as the entire capacity is operating from 2QFY18.
Counterparty Risk: The rating is constrained by the financial profile of MPPMCL which in turn sells the power to Madhya Pradesh distribution companies. Its debt service coverage remains comfortable, even if the working capital facility is accessed to cover four months of revenue. Although tariffs for renewable energy projects have seen a steep fall, Ind-Ra expects the PPAs signed at higher tariffs to be adhered. Any termination or renegotiation effort on the PPA will be treated as an event risk.
Debt Structure: Debt will amortise in 72 structured quarterly instalments, starting from the fifth quarter from the scheduled commercial operation date. The project does not feature any debt service reserve; however, dividend distribution will be annual after the testing of financial covenants. RGSEPL plans to arrange for a working capital facility if debtor days increase. The absence of a debt service reserve exposes the project to a counterparty risk in the absence of timely sponsor support after the working capital has been exhausted. The agency expects the project company to maintain adequate liquidity to meet counterparty and generation shortfalls.
Positive: Demonstrated operating track record, including a plant load factor higher than P90 estimates, regular tariff receipts from counterparty and sustained debt service coverages could lead to an upgrade.
Negative: A lower-than-expected P90 PLF and or any significant payments delays from the offtaker and absence of sponsor support in the event of cash flow stress could lead to downgrade.