Forex crunch likely to hit IPPs with possible payment delays from CEB

The foreign exchange shortage, which took a turn for the worse in the recent past, resulting in regular power cuts, is likely to hit the Independent Power Producers (IPPs), due to the potential delays in payments from the Ceylon Electricity Board (CEB), according to Fitch Ratings.  

Fitch Ratings slashed the rating of Lakdhanavi Limited, which operates a large thermal power plant that provides 15 percent of the country’s power output, by two notches to AA-, from AA+, on January 26, with a Stable outlook, while Resus Energy PLC saw its rating outlook being revised to Negative, from Stable. 

Resus Energy’s national long-term rating stands unchanged at A+. Resus is a small-scale IPP, which has an installed capacity of 14MW. It accounts for 0.3 percent of the country’s installed power capacity and generation. 
“The downgrade reflects the risk of disruptions to Lakdhanavi’s domestic operations from a potential fuel shortage and heightened counter party risk, due to its exposure to payments from the Sri Lankan government amid the country’s falling foreign currency reserves and weakening fiscal position,” Fitch Ratings said. 

On Resus Energy, the rating agency said, at present 100 percent of its revenue is coming from the CEB and delays in payments could worsen the company’s already tight liquidity position. 
“We expect Resus’ receivable days to increase to 180 days in the next 12-18 months, from 152 days at the end of the financial year to March 31, 2021 (FYE21),” Fitch noted. 

However, so far, neither Lakdhanavi nor Resus has experienced any material payment delays from the CEB. 
Lakdhanavi is building a new LNG power plant, Sobadhanavi, which is expected to be commissioned by 2024, adding 13 percent of the total energy demand and potentially saving Rs.12 billion annually. 

At present, 50 percent of the country’s energy demand is met through fossil fuel and Sri Lanka has a target to generate 70 percent of energy through renewable energy by 2030 in its quest to reach the net zero emission goal set for 2050, at the COP26 Global Climate Summit, last year. 

However, from a rating perspective, while that could raise the company’s net leverage to 5.9x by FY24, from 1.1x in FY21, due to its US $ 190 million investment in the plant, that could also increase its reliance on the CEB for its revenue and gross profit, diluting its geographical and counterparty diversification, as the company does not have any firm plans for overseas expansion. 

Currently, Lakdhanavi has a power plant in Bangladesh. 
“The downgrade also takes into account the company’s increasing exposure to the CEB in the next few years, with the commissioning of the new liquid natural gas (LNG) power plant Sobadhanavi,” Fitch said.