The basic condition for any power plant acquisition, as NTPC Ltd said in its latest earnings call with analysts, is that it should have the power purchasing agreement (PPA). NTPC, which has been on the prowl for stressed power plants, has largely agreed to acquire only state-owned plants with PPAs till now.
NTPC is treading cautiously, but not without reason. The ill-effects of ignoring PPAs are clearly seen in CESC Ltd’s Chandrapur power plant gambit. The plant struggled for years to find buyers for the power it produced, resulting in copious losses.
CESC’s experience and the thinking process at NTPC, India’s biggest electricity generator, hold the key to the resolution of stressed power assets. Prodded by the central bank’s stricter timelines for stressed assets recognition and corrective measures, the lenders and the government are discussing new solutions.
One such measure involves reducing the debt to manageable levels by converting a portion of it into equity. The lenders’ consortium will then bid out the projects. But that is easier said than done.
Will corporate India come forward to buy such assets? Despite the debt reduction, the plant will have to operate with at least 50% utilization just to avoid losses. That means the lenders and the government will not only have to lower debt but also assure minimum utilization levels, an assurance beyond them, because demand is rising only gradually. A study earlier this year by India Ratings & Research calculations show that a power plant can not only service its debt but also generate a reasonable return on equity at 60% utilization levels, provided the enterprise value is reduced by a third. But are stakeholders prepared for such steep haircuts?
Reducing the debt to manageable levels and targeted measures such as dedicated PPAs to stressed power plants can prepare the ground for full resolution. But stakeholders will derive good value only when the current steady rise in demand reaches a tipping point. With the thermal power sector not seeing significant capacity expansion, analysts see the sector reaching this situation in three to four years.
“Our analysis suggested that 81GW (gigawatts) of thermal power capacity remains stressed—of which only 7-22GW has the potential of being taken over. The remaining 59-74GW of capacity may not find bidders immediately given weak power demand, fuel shortages, etc., and face risk of scrappage if referred to NCLT (National Company Law Tribunal),” Bank of America Merrill Lynch said in a note.
“The aforesaid would have impacted $50 billion of bank loans to the powergen sector and led to $38 billion of write-offs. However, transfer of stressed assets to ARC (Asset Reconstruction Companies) and sale after 2-3 years would fetch better valuation, if the government’s efforts to revive power demand bear fruit,” Merrill Lynch added.
When it comes to resolution of stressed power assets, the motto should therefore be the Latin Festina Lente, or make haste slowly, AKA “more haste, less speed”.
Source: Livemint, June 18, 2018