AP High Court Order: Immediate Resolution of Cash Flow Stress in State Renewable Projects Unlikely

India Ratings and Research (Ind-Ra) believes solar and wind power projects in Andhra Pradesh are unlikely to secure any immediate respite from cash flow-related pressure in view of the recent order given by Andhra Pradesh (AP) high court. The order to pay an interim tariff of INR2.44/unit and INR2.43/unit for solar and wind projects, respectively, will not be sufficient for the entire debt servicing for the capacity of 554MW in Ind-Ra’s state portfolio (with AP state discoms as direct counterparties).

In the absence of internal liquidity generation for the following six months at least, all these affected projects will have to necessarily lean on sponsor support or any balance liquidity available with the project (reserves, undrawn lines, cash balance etc.) for debt servicing till the projects start receiving full monthly tariffs as per power purchase agreements (PPA). Almost all of the projects that have direct or indirect exposure to AP state counterparties have already been kept on Rating Watch Negative (RWN)* by the agency, and the cash flow stress can increase from here owing to non-recovery of full project tariffs in the coming months. Also, the interim tariff judgment as per the order could set a dangerous precedent. If other discoms follow a similar course of action, it will endanger foreign as well as domestic investments, leading to an increase in the share of non-performing assets. In its press release dated 4 July 2019, Ind-Ra had highlighted the risk faced by solar and wind power projects in AP state due to tariff renegotiations and payment delay risks.

The high court order has given three broad directions – 1) All the issues related to tariff are to be raised with Andhra Pradesh Electricity Regulatory Commission (APERC) and need to be resolved within six months; 2) A  directive has been issued that power curtailment cannot be imposed without followed regulatory processes and giving required notice; 3) Payment of interim tariff at the rate of INR2.44/unit and 2.43/unit will have to be made for solar and wind projects, respectively.

Hopes of immediate resolution of the matter by generators seem to be waning as the matter might not be resolved for at least six more months, as per timeline stipulated in the order, necessitating the need for addition liquidity injection by sponsors into the project or additional working capital lines to fund burgeoning receivables (AP discom has made payments only till the month of July 2018, as per Ind-Ra rated portfolio). Given the seriousness of the situation, lenders might become wary of increasing their exposure to these projects, forcing generators to depend on sponsors or group companies for their funding requirements. Sponsors that are already low on liquidity and have significantly large exposure to AP state discoms might find it increasingly difficult to keep supporting their projects.

With respect to the second part of the order, the directive prohibiting arbitrary curtailment is slightly positive, but the actual implementation of the same is unclear. Since most of these old PPAs do not have any provisions for providing compensation to generators in case of grid curtailment, there is a risk of permanent revenue loss in case some of these projects are not allowed to inject power into the grid.

Regarding the third and last part of the order, while these truncated tariffs might be better than an absence of revenues, this certainly would not avert payment defaults by projects in many cases. The interim tariff level suggested in the order seems to be insufficient for the affected projects to ensure timely debt servicing, as per the agency’s estimates. Even the timing of this interim tariff payment remains a question as of now, given the chances of additional litigation on this issue. A total 554MW projects in Ind-Ra’s portfolio that have been directly affected have an average tariff of INR5.50/unit, resulting in an average debt service coverage ratio (DSCR) of 1.22x. Based on just the interim tariff of INR2.44/2.43 per unit mentioned in the order, none of the projects in Ind-Ra’s portfolio are self-sufficient with respect to debt–servicing, and will have to depend on external support for the same. Any payment delays on account of non-availability of support will adversely affect project lenders (including public sector lenders) and the industry as a whole.

In a nutshell, the order has extended the timeline of resolution of matters by at least six more months and has not given enough support to generators for the interim period. The liquidity pressure on the affected projects would not ease in the near term, which is clearly a credit negative for these projects.

Ind-Ra had placed the ratings of the below mentioned entities (including entities that are part of obligor co-obligor structure wherein AP is one of the counterparties) on RWN in July 2019.  The RWN indicates that the ratings could either be affirmed or downgraded from the existing levels.

SOLICITATION DISCLOSURES

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

Source : indiaratings