Lanka Rating Agency upgrades Vidullanka PLC’s ratings to A/Stable/P2
Monday, 17 November 2014 00:00
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Lanka Rating Agency (LRA) has upgraded Vidullanka PLC’s (“Vidullanka” or “the Company”) respective long- and short-term corporate credit ratings to A and P2 respectively from A- and P2. The long-term ratings carry a stable outlook. The rating upgrade is premised on the Group’s notable improvement in cash flow generation and debt protection in FY Mar 2014, as such, the Group’s funds from operations (“FFO”) debt coverage levels improved and maintaining a healthy level of cash reserves. LRA takes into account of Vidullanka’s future cash generating capabilities from the newly built Lower Kotmale mini-hydro power plant which provides more comfort within the analysis.
Vidullanka owns and operates several mini-hydro power plants (MHPPs) that supply electricity to the Ceylon Electricity Board (CEB or the Utility). The Company’s subsidiary, Vidul Engineering Ltd (VEL), is engaged in the design and construction of MHPPs and project management, while Co-Energi Pvt Ltd (CEL), one of its joint ventures (JVs), delivers energy efficiency consultancy and related services to construction and industrial companies.
The ratings were upheld by the Group’s favorable contract terms with CEB. Under Vidullanka’s power purchase agreement (PPA) with CEB, the latter is obligated to accept and purchase all power produced and delivered by the Company’s MHPPs throughout the tenure of their respective contracts. Vidullanka’s financial profile is strong, underscored by its relatively low gearing levels and healthy debt protection metrics.
The Group’s gearing level has improved to 0.32 times as at FYE 31 March 2014 (“FY Mar 2014”) (FY Mar 2013: 0.34 times) on the back of healthy internal capital generation. On the other hand, Vidullanka’s debt protection metrics are deemed strong, supported by its robust cash flow generation; the Company’s funds from operations (“FFO”) debt coverage ratio stood at 0.72 times in fiscal 2014, improved from 0.49 times a year earlier, on the back of improved performance during the period.
The demand for power is expected to grow at about 7% per annum on the back of robust economic growth, mainly supported by the development of infrastructure facilities.
As such, independent power producers (IPPs) are well-positioned to benefit from the demand-supply gap in the short to medium term. Overall favourable economic prospects and increased investments in the manufacturing sector, coupled with the government’s long-term vision of electrifying all households, which is expected to benefit IPPs.
Meanwhile, the ratings are weighed down by the exposure to rainfall fluctuations. Revenue generated by each plant highly depends on rainfall in the plant’s catchment area.
This is reflected in the positive correlation between revenue and plant factors, which vary based on rainfall. Power plants recorded low generation levels between December 2013 and March 2014 compared to the corresponding period in 2013 due to poor rainfall.
Given that the Group depends solely on hydro resources for power generation, its revenue is highly susceptible to fluctuations in rainfall. Further, Vidullanka remains a small player, with an effective generation capacity of 11 MW as at end-FY Mar 2014.
Its contribution to the country’s power generation via NCRES remains minimal at less than 3.19%, based on total installed capacity.
We note that the Group’s performance improved in fiscal year 2013 & 2014, in line with the increase in revenue, which was reflected by capacity addition through Haloya MHPP of 0.8MW which was commissioned in July 2012, 1.3 MW Wembiyagoda MHPP which was commissioned in March 2013 and 2.5 MW Madugeta MHPP which was commissioned in November 2013.
This is reflected in its growth in power generation potential which has increased to 43.88 GWh in 2014 from 26.58 GWh in 2012. Further, the weather conditions remained to be favourable for HPP in most part of the year 2014. The Group’s high dependence on BBO MHPP and BTO MHPP decreased with the advent of two new plants during the year.
The Group has added its seventh 4 MW Lower Kotmale Oya MHPP through a joint venture with a consortium of investors led by Jaywise (Construction) Limited in June 2014.
This is expected to significantly expand Vidullanka’s power generation capacity which will increase the cash flow generating ability along with geographical diversification of its power plants.
